Chinese Economy Returning to Robust Levels

After wallowing for more than two years in the economic doldrums, China is back.

Powered by a surge in exports, the Chinese economy is returning to the robust levels it enjoyed before the dark days of the Asian financial crisis, which mired this country in a painful recession.

Through the first half of the year, China logged a healthy annualized growth rate of 8.2%, according to the Chinese government. That’s up more than a full percentage point from last year’s officially pegged rate of 7.1%, which is almost certainly overestimated. Two years of nonstop deflation have ground to a halt, while consumption has picked up.

Most impressively, exports grew 38% compared with the same period last year, hitting $115 billion in a global and regional market again hot for Chinese goods--everything from shoes to baby gear to medical supplies.

“The economy has rebounded,” said Andy Xie, an economist with Morgan Stanley Dean Witter in Hong Kong. “And the quality of the growth is much better,” because it is less dependent on heavy government spending out of Beijing.

Weak spots remain, such as excess inventories affecting 80% of the country’s products, continued layoffs in flagging state-owned enterprises and price wars for certain goods such as televisions.

But with almost all leading indicators on the rise, and with Chinese entry into the World Trade Organization expected by year’s end, analysts and foreign firms have returned to being bullish on the world’s biggest developing economy.

At the leading edge of the pack is Motorola, already China’s top supplier of mobile phones.

Last week, the telecommunications giant announced it was both reviving and expanding a massive high-tech project in Tianjin that had been on ice since 1998.

Work is resuming on a $1.5-billion wafer fabrication plant that sat as an empty shell for two years, when the regional slump and a wider downturn in the semiconductor industry forced the company to put off the facility’s completion while nursing its wounds.

“It didn’t make good sense for us to keep putting money into that” during the decline, spokesman Scott Stevens said.

Now, the capacity of the new chip-making plant has been increased to meet greater-than-expected demand. That, plus a $400-million expansion and restructuring of the company’s manufacturing complex, pushes Motorola’s overall investment in China to $3.4 billion, making the company the largest foreign investor in China.

“This industry is like a roller coaster. It ramps up really fast, like flipping on a light switch . . . and then there’s a glut because economies fluctuate,” Stevens said. “For us, the China picture was one where the leaders of the company said, ‘We can either avoid that market or invest heavily and take advantage of the opportunities.’ We would avoid it if we think it’s too risky.”

Motorola’s present site dominates the special technological development area in Tianjin, a former foreign entrepot still graced with colonial architecture about two hours’ drive from Beijing.

It’s an American factory with Chinese characteristics. On the road outside, a huge triptych of billboards displays paintings of smiling Chinese leaders Mao Tse-tung, Deng Xiaoping and current President Jiang Zemin. Inside, the gleaming lobby features a plaque dedicated by Politburo member Li Ruihuan and an electronic marquee that encourages employees to “create a new spirit” in achieving customer satisfaction.

About 10,000 employees work here. A portion will move to the new plant, where chips will be processed--a first for Motorola in China--and tested, eliminating the need to import wafers. The company expects the new facility to create 2,000 jobs over the next three to four years.

It will not be without competition. Other multinationals have cast a hungry eye on China’s huge cell-phone market, which analysts expect to more than triple in the next four years. Japan-based NEC is investing in two similar foundries, while some Taiwanese companies are checking out possibilities for production on the mainland.

Stevens said Motorola recognizes the risk of its investment in the face of potentially stiff competition.

But “when you’ve got companies [like Motorola] that want to become the de facto standard,” he said, “you’ve gotta let it hang out a bit.”

The dangers to foreign investment in this rapidly changing country can be all too real. In Tianjin, not far from Motorola, workers at a U.S.-owned packaging plant took several foreign managers hostage--including one American--last week to protest looming layoffs. The incident ended peacefully after nearly two days.

The packaging company had previously been a struggling state-owned enterprise before being taken over by the Americans. Across China, state-run businesses are failing, pushing people out of work in a land where not long ago employment and welfare were guaranteed.

Growing unrest over such closures continues to dog the Communist regime. So does discontent in China’s vast countryside, where peasant farmers have watched prices plummet and taxes rise.

Analysts say that economic growth of 8% a year is necessary to provide jobs for those left unemployed by market-oriented reforms.

During the recent recession, the state embarked on an ambitious program of investment spending to stimulate growth, pouring $24 billion into infrastructure projects. Though at a lower rate, government spending remains part of Beijing’s strategy to keep the economy humming, especially a loudly trumpeted plan to develop urban centers in China’s poverty-stricken West.

“There is an enormous amount of growth that’s being funded by state investment in the infrastructure sector,” said Laurence Brahm, a consultant in Beijing.

Developing the West, Brahm said, would help China eventually lessen its reliance on exports as the driving force of economic growth, as products could be shipped and sold domestically rather than overseas.

For General Electric, which has 7,000 employees and 30 entities in China, the pickup in both overseas and domestic demand has reversed the shrinkage in revenue the company experienced during the Asian financial crisis.

“The overall recovery of the region has helped us in China,” said David Wang, who oversees GE’s China operations, which rake in about $1.5 billion in revenue.

Orders for plastics, medical equipment and lighting are up. Bigger-ticket items, such as aircraft engines and power plant turbines, have been slower to regain ground.

But Wang, a frequent traveler, sees the seeds of recovery for both Asia and GE in the crowded flights that once again ply the skies, as business in the region comes back to life.

“It used to be that you could go to the airport and buy a ticket” on the spot, he said. “Now you have to book ahead again.

“It’s a great sign for us,” he said. “That means they need more airplanes”--and the engines that go in them.

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China’s Prospects Brighten

China may be leaving behind the dark days of the Asian financial crisis. The government reports GDP growth through the first half of the year is a healthy 8.2%. Exports grew by 38% compared with the same period last year. The inflation rate is forecast to stay at 0.5% for the year. With the country’s entry into the World Trade Organization expected by year’s end, analysts and foreign firms have returned to being bullish on the world’s biggest developing economy.

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Exports and Imports Climb ... (In billions of U.S. dollars)

Projected exports for 2000: $223.9 billion

Projected imports for 2000: $183.9 billion

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... and Gross Domestic Product Shows a Rebound. (Percent change from previous year)

Annualized rate through first half of 2000: 8.2%

Sources: International Monetary Fund, Chinese government

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Researched by NONA YATES/Los Angeles TImes