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Beijing blast: how long will China's boom last? Few know for sure, but the opportunities are now.

Like many places in modern China, the southern city of Guilin is a hive of nervous productiveness, a clash of new and old. Foreign tourists flock here to drink in views of jagged limestone mountains. Factory chimneys, too, dot the horizon over emerald rice paddies. Industries flourishing here include textiles, paper, silk, leather, sugar, oils, fats, cement, steel and iron, among many others.

Despite China's nominal status as a communist country, the streets are an open market on steroids. Everything is for sale and everything is negotiable, from lychee fruit to car parts. Ten years ago, in large cities like Guilin, you could buy fake Prada handbags and other products in the most open and official of places, including airports and the steps of government buildings. Today, thanks to an intellectual-property crackdown by the government, knock-off designer goods are a bit harder to find. But they're still here. Go into a store, and there they are.

The government is building an elevated highway in Guilin, part of a national plan to create an interstate system that would eclipse that of the United States. It's just those kinds of expansive projects, though, that unnerve economists, who fear unneeded infrastructure could too rapidly bring unneeded plants and investment, feeding an eventual collapse.

China's explosive growth seems novel to many, but for nearly three decades running it has been the Land of the Rising Economy. The evident boom of the last few years is the blossoming of decades of economic reform begun by President Deng Xiao Ping in 1978, when he began the conversion from a closed country to a "market-compatible" economy. Desperate for capital, China opened its markets to foreign investors.

It worked. Productivity has increased by an average of nearly 10% annually. China's population, the largest in the world, now comprises 1.30 billion potential consumers, one-fifth of all people on the planet, adding an estimated 15 million more--roughly the population of Chile--every 12 months. Incomes also are growing. Measured by purchasing power per capita, the Chinese in 2005 were richer than Venezuelans but slightly poorer than people in the Dominican Republic. Like any emerging country, dislocation is increasingly common. People are moving from the country to the city. Their diet, their purchasing habits and tastes are changing.

During the Latin American doldrums of the 1980s, when regional growth hovered around 1%, China's economy averaged growth almost 10 times higher. Its exports rose to a little more than a fifth of all world trade by the early part of this century, up from 5.7% of the total trade in the 1970s, according to the International Monetary Fund. Accordingly, Latin American exports to China have increased six-fold, though they still comprise less than 4% of the market. During the first half of 2006, Latin American countries sent US$11.40 billion in goods to China, according to the Chinese Commerce Ministry. China exported $12.40 billion to Latin America.

"China's boom is sustainable as long as the 'catching-up' process is allowed to proceed," says Wing Thye Woo, an economist at the University of California Davis who has been a consultant to the Chinese Ministry of Finance and an advisor to the United Nations on Asian economic development. "Politically, the legitimacy of the Chinese state is based on nurturing this catching-up process."

Bottlenecks. Yet mismanagement is a real risk, says Woo. "Too-loose monetary policy will accentuate the boom, causing production bottlenecks, and the government would then have to avoid fighting the high inflation with overly stringent credit and expenditure policies," he says.

Without proper controls on the expansion, things could go south quickly. Yet China's closed government offers little insight into its finances and inner workings. In a 2005 Inter-American Development Bank report, economist Eduardo Lora warned that the serious risk from China is not competition but an eventual failure of its enormous financial system. "This has been an issue that, surprisingly, has attracted little attention from researchers and analysts," he wrote.

Even if it seems unlikely now, it is not unthinkable that the Chinese bonanza could slow or end, not unlike what happened in recent years to Russia, Indonesia and Japan, or to the once chronically overheating economy of Brazil. In July, the Chinese National Bureau of Statistics reported that China's economy grew by 10.6% during the first half of 2006, outpacing even Chinese predictions.

Zheng Jingping, a spokesman from the bureau of statistics, said during a press conference that the most recent economic expansion was "reasonable." He and other officials credit strong exports and investment in fixed assets. Latin America plays a part: A plentiful supply of food and raw production materials--key exports from the region--held down inflation.

Brazilian trade officials say that the Chinese know they have a problem. The question is how they will react. "I don't think that such growth is sustainable either, but I still think China can grow at a very high rate with some controls," says Thomaz Zanotto, international trade relations director at the Sao Paulo state industrial federation Fiesp, one of Brazil's most powerful trade organizations

In response to international and domestic pressure, Chinese officials have initiated measures aimed at avoiding an economic meltdown, including a campaign to rein in a flurry of new construction and excessive cheap credit. The government has vowed to reform financial systems and reserve more money, oil and other natural resources. They also have set a goal to boost domestic demand for products, counterbalancing their own growth.

In late July, the People's Bank of China announced that it would raise reserves that most banks must deposit with the Central Bank by a half-point to 8.5%. In a statement, the monetary authority cited the need to curb money supply and credit in order to sustain economic growth.

The move received cautious kudos from executives and analysts. "China is at a crossroads," says Xinyue Jasmine Geffner, who heads the Americas section of China international business development at HSBC Securities. She and her team assist Chinese and Latin American businesses on investment and trade issues between the two regions and recently arranged for delegations of the Ministry of Commerce and the Shanghai officials to visit Mexican industry leaders and HSBC clients.

Optimism. Geffner is among those who believe that China is on the right track to sustain similar or only somewhat slower expansion rates. "What this means is that long-term demand for commodities and agricultural products from Latin America will continue, which will in turn help encourage Chinese investment," she says.

Experts close to the reforms are optimistic. "If no serious mistakes are made, and the global economy does not go heads up, China looks good for the next 20 years," says Stephen Green, a senior economist with Standard Chartered Bank in Shanghai. Key issues, however, remain, he says, including complex processes such as privatization, stabilizing the bank system, interestrate and exchange-rate liberalization, and sorting out environmental issues. "These are not easy challenges, but with growth they should be manageable," Green says.

Whatever the future holds, the opportunity is now. The Chinese are buying, selling, lending and investing more than ever and at a breathless pace, and Latin American countries are in a rush to reap the windfall. Governments in the region have used Asian cash to pay down foreign debts and shore up their finances, all while spending heavily on new ports, airports and roads to feed the roaring Chinese economy.

Brazilian and Peruvian officials, for instance, this year began cutting a $700 million highway through the Amazon, a kind of South American Silk Road that would open the Pacific to their products. Chinese officials have been making deals to exchange goods directly for raw materials, cutting out dollar-priced world exchanges. Brazilian soy and steel, Mexican avocados, Argentine cooking oil, Venezuelan petroleum and Chilean copper are all headed to the Far East.

Brazilian iron-ore producer Companhia Vale do Rio Doce (CVRD) in July announced it would use the Norwegian-flagged Berge Stahl, the world's largest bulk cargo ship, to move ore to China. In 2005, CVRD sold 54.2 million tons of ore to China, up 32% from the previous year. In the first quarter alone it sold 17.2 million tons, up more than 58% from the same quarter a year earlier.

"To be without China is to be without a future," says Alberto Abdala, whose company, Maderos de la Patagonia, has exported wool from Argentina to China and Asia for nearly a decade (the company also sells woods). In 2005, Argentines exported almost $3.60 billion in goods to China, according to the South American country's bi national chamber.

The biggest worry right now for Latin American and Chinese executives seems to be figuring out how to be both trade partners and competitors. Mexico continues to post a trade deficit with China and other Asian countries. Mexican industry leaders complain of disappearing jobs. The Peruvian textile industry recently initiated an anti-dumping investigation of Chinese imports. Soy and animal hide exporters are getting a big payday, while toy and shoe factories feel the squeeze. Rocky. Brazil and China, hailed as the potential trade heavyweights, have had their rocky moments as well. In June, Chinese state petroleum company Sinopec and Brazil's Petrobras broke ground on a $240 million gas pipe project that will connect northeastern and southeastern Brazil, but only after suffering delays and skyrocketing costs. Brazilians were angry when China did not back its bid to join the United Nations Security Council in return for help with China's push for market-economy status.

Yet China is keeping--if more slowly than predicted--its promises to invest in the region. In 2005, the Chinese pumped $4.20 billion in non-financial direct investment into Latin America. During the first half of this year, that number totaled $930 million. Chinese President Hu Jin Tao in 2004 made a highly publicized visit to Argentina, Brazil, Chile and Cuba. Since then, dozens of trade pacts have been signed. Venezuelan President Hugo Chavez in January 2005 alone signed some 19 cooperation agreements, including plans for Chinese investment in oil and gas exploration. Chile and China are now negotiating a free trade pact. The next meeting of the Asia-Pacific Economic Cooperation, in 2008, will be in Peru.

Chinese executives are coping with risks themselves. Some Latin American countries continue to be plagued with unstable political and economic systems and related bureaucratic headaches, as well as corruption and mismanagement. Shanghai Baosteel's attempt to build a $1.50 billion steel mill has been frustrated by Brazilian zoning approvals and by politics. Chinese companies, such as Sinochem and PetroChina, have stakes in oilfields valued at more than $1 billion in Ecuador, where the government has threatened to reclaim private land. In January, Bolivian president Evo Morales visited China to court more Chinese investment in his company's oil reserves, even as the threat of nationalization scared other foreign investors away. The Chinese firm Shengli never completed a $1.50 billion deal with Bolivia's state-run oil company, YPFB.

Still, the overriding mantra is to invest, not retreat. Says business consultant Jorge Castro, a former Secretary of Strategic Planning for Argentina: "The greatest risk is not getting into the market, not participating."
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Publication:Latin Trade
Date:Oct 1, 2006
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