China’s Import Needs Make It as Much an Opportunity as a Threat

An ancient Chinese proverb begins with the observation that “a horse cannot gain weight if not fed with extra fodder during the night.”

In that same spirit, China’s economy is putting on the pounds, importing huge amounts of material from around the globe as it tries to make the transition from socialism to capitalism -- all while still being ruled by the Communist Party.

The rise of China as an exporter is, of course, well established. Over the last three decades, it has emerged as “the world’s factory floor,” in the words of my colleagues Evelyn Iritani and Marla Dickerson, who in October documented how China’s explosion as a cheap manufacturer is posing serious challenges to the economies of the U.S., Mexico and other nations.

But the flip side is that China -- with a population of 1.2 billion -- is gobbling up enormous quantities of goods produced by other nations. Despite its image as demon exporter to the world, China imports almost as much as it sends abroad.

The recent news that China has become the world’s largest importer of steel underscores the point. China is, in fact, the world’s largest producer of steel, at roughly 175 million tons a year. And yet it is importing 25 million tons annually to meet its ever-expanding needs.

“You should see all the building of highways and railroads, dams and bridges in western China,” says Richard Baum, a China scholar and professor of political science at UCLA who traveled to the remote reaches of the country this year.

The bottom line is that, with economies slow in Europe, Japan and the U.S., China’s headlong pace holds considerable promise for the world.

“China is the big story in the global economy in 2003 and in 2004 and in 2005,” says Donald Straszheim, a Santa Monica- based economist who advises institutional investors.

Indeed, Straszheim believes that China’s development in this decade will be more significant for the world economy than even Japan’s meteoric rise after World War II.

Not that China’s path to capitalism is going to be smooth. Even economists who foresee great growth in China’s future worry about “fault lines,” says Charles Wolf of Rand Corp., the Santa Monica think tank.

Wolf works with researchers from China and the U.S. in a high-level study group that meets annually in Beijing or at Rand headquarters here to work out solutions to looming problems for China. Among them: energy, water, AIDS and the changing demands of foreign investors, who last year poured more than $50 billion into China’s burgeoning economy.

Another big question mark is how China will work out an estimated $500 billion in bad loans at state-owned banks, remnants of an earlier era.

Meanwhile, growing anger and impatience in Washington over the U.S. trade deficit with China -- quickly approaching $100 billion -- could lead to demands that Beijing raise the value of its currency, thereby reducing the country’s exports and undermining its development.

Yet despite all this, the U.S. economy has as much to gain from China’s long march ahead as it does to lose.

China, for example, surprised experts this year with surging car sales. Philip Murtaugh, chairman of General Motors Corp.’ s China Group, estimates that 3.4 million autos have been sold in the country, up 54% from 2001.

GM, with partner Shanghai Automotive Industrial Corp., is investing more than $100 million to acquire a fourth auto plant and boost its production in China beyond the current 100,000 cars a year. GM also sees business opening up in China for its finance arm, GMAC.

At the same time, China is becoming a huge market for legal, financial and technical services.

Morrison & Foerster, a major California law firm, has just won the contract to be the international legal counsel for the Beijing Olympic Games in 2008. That means the firm will enjoy six years of work negotiating sponsorships and contracts with suppliers and international media, says Kelly Crabb, one of the Morrison & Foerster partners in charge of the assignment.

When looking at China, a particularly important point to understand is that, official Communist dogma aside, it is an entrepreneurial economy. And that presents tremendous prospects for another entrepreneurial economy: that of California.

Hong Liang Lu, a UC Berkeley-educated American businessman, found that out during visits to China in the last decade. He noticed that monthly charges made cellular telephones expensive to use.

Lu returned to Alameda, Calif., and with an investment from entrepreneur Masayoshi Son of Japan, founded UTStarcom Inc., which makes limited-range “urban” cellular phones on which rates are much less expensive. The result: a product with instant appeal to the Chinese. The company’s sales have rocketed to $960 million this year from $187 million two years ago.

Another California firm, Lightconnect Inc. of Newark, has just won a multiyear order from China’s ZTE Telecommunications for a key component of fiber-optic Internet networks.

“Our business was down here,” says Peter Clark, Lightconnect’s president, “so we went to China and presented to as many firms as we could. It was marketing 101.” The order should mean several million dollars in revenue for Lightconnect, which has seen its annual sales fall to $1.5 million.

Thuris Corp., an Irvine-based biomedical company that makes diagnostic tests for symptoms of Alzheimer’s disease, has entered a collaboration with China’s National Center for Drug Screening. Thuris will test prospective remedies for Alzheimer’s and share in development of promising compounds.

And this is merely the beginning.

Economist Andy Xie of Morgan Stanley points out that China’s industrial development so far has largely involved only the eastern provinces, home to 338 million people. That’s a bigger population than that of the United States, but only one-fourth of China’s total.

During this decade, development will focus on the middle and upper Yangtze River regions, where an additional 300 million people live. “That will bring half of China’s population into the global economy,” Xie says.

At present, China’s economy has an annual output of goods and services of about $1 trillion, making it roughly comparable to that of California, which has only 34 million people.

The inarguable fact is that what the world is witnessing in China is not mere economics, but history -- and opportunity.

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James Flanigan can be reached at jim.flanigan@latimes.com.