Import-hungry China drives world growth

China, criticised by some US lawmakers and executives who say its cheap exports are destroying jobs, is becoming an economic boon for much of the rest of the world - because of its imports.

China's purchases of goods from abroad surged 41 per cent in the first nine months of 2003, positioning it to pass Japan this year as the world's third-largest importer, behind the US and Germany. The buying spree has helped boost prices for producers of commodities from metals to agricultural products and increased profits of Asian companies including steelmakers and manufacturers of construction equipment.

"China has become the engine of global growth," said Donald Straszheim, a former Merrill Lynch chief economist who heads his own economic consulting firm in California. "Everyone expects the US to be the global locomotive, but this time the Chinese are playing a major role as well."

The Chinese economy, the world's sixth largest, is expanding at an estimated 8 per cent annual rate, three times as fast as the Group of Seven industrialised economies. At US$1.24 trillion, China's gross domestic product is just about 10 per cent that of America's $11 trillion and almost a third the size of Japan's economy, the world's second biggest.

"By our estimates, Chinese economic growth accounted for 17.5 per cent of total world GDP growth in 2002, more than four times its 4 per cent share in the global economy," said Stephen Roach, chief economist for Morgan Stanley in New York. "If anything, China's global impact appears to have increased in 2003."

South Korea's Posco, the world's fourth-largest steelmaker by production, and Japan's Komatsu, the world's No 2 maker of construction equipment, both attribute higher profits partly to sales gains in China. China also is providing a market for raw materials and components from neighbouring economies such as South Korea, Taiwan and even Japan, which now consider the nation a major customer along with the US.

China's emergence as a contributor to world growth has been lost in the US amid assertions that the country is draining US jobs and refusing to buy US exports. While China's economy has flourished, the US has lost 2.6 million jobs since President George Bush took office, half of them since the last US recession ended in November 2001.

Commerce Secretary Don Evans last week denounced China as a closed market and predicted that the US trade deficit with the world's most populous nation will reach a record US$130 billion this year.

While China is running a trade surplus with the US, it has a deficit with the rest of the world. Last year, China bought US$352 billion of goods and services while exporting $388 billion - a worldwide surplus of $36 billion. When its trade surplus with the US - $103.2 billion in 2002 - is subtracted, China posted a $67.2 billion deficit with the rest of the world.

This year, China's global surplus is expected to shrink to US$18 billion, reflecting $477 billion in imports and $495 billion in exports, according to Hong Liang, economist for Goldman Sachs Asia in Hong Kong. After excluding its surplus with the US - expected to be at least $121 billion - China's deficit with the rest of the world would total $103 billion.

China will probably overtake the US to become the European Union's biggest trade partner by 2010, the EU forecast on Friday. Trade between China and the 15-member European Union reached 115 billion euros (HK$1.03 trillion) last year and may expand to US$200 billion by 2010, EU and Chinese government leaders said.

With Japan's economy still growing at just 1 per cent in the quarter ended in June, China also has become an economic leader for the rest of Asia. Over the past four years, China's net purchases from Southeast Asian countries have risen to US$25 billion - or 2 per cent of the region's entire output - from $1 billion in 1997. This buoyed export-dependent countries at a time when their other major market, the US, was emerging from the recession, Ms Liang said.

"I think China more or less saved Asia last year," she said.

Asian countries that once depended on the US or Japan as their primary markets are "re-orienting themselves" to be "more complementary to the Chinese economy", said Lael Brainard, a senior fellow at the Brookings Institution, a research organisation in Washington. Perhaps the most visible part of China's leap forward in import buying has come in commodities, Mr Straszheim and other economists said.

"Platinum, grain, naphtha, you name it - prices of any commodities with a China factor are soaring," said Akira Kamiyama, a fuel trader at Mitsui in Tokyo.

Posco said last month that China had overtaken Japan as its top export market, accounting for 23 per cent of the company's foreign sales. Posco's new chief executive, Lee Ku Taek, has made sales to China a priority.

For Nippon Steel, Japan's biggest steelmaker, shipments to China now account for 20 per cent of the company's total exports, up from 10 per cent in previous years, Akio Mimura, the company's president, said.

Japan's Komatsu doubled its sales of mining and construction equipment to China in the three months that ended June 30, boosting profits for that period almost six-fold, the company reported.

"On an average day, we'd knock back between eight and 11 inquiries we can't meet for iron ore, mainly out of China," said Barry Eldridge, managing director of Perth-based Portman, Australia's third-biggest iron ore producer. "We could double or triple production and still sell it."

China is the largest buyer of soybeans from the US, the world's top producer, and has become Asia's top importer of African crude oil, buying about half the 1.1 million barrels a day shipped to the region.

"The growth potential for China and so for commodity companies is enormous," said Brian Parker, who helps manage US$4.3 billion as a strategist at Citigroup Asset Management Australia in Sydney. "The engine of growth China has become is really quite staggering."

In 1998, China consumed 11.1 per cent of the global aluminium supply; this year, it will use 18.6 per cent and by 2005, 21.4 per cent, according to figures compiled by John Mothersole, Washington-based commodities specialist for Global Insight, a Massachusetts economic forecasting firm. By comparison, he said, the US consumes 20.3 per cent of world aluminium supplies - down from 26.7 per cent in 1998 - and that is expected to fall to 20 per cent by 2005. The trend is similar for copper, zinc, nickel and semiconductors.

"The country is gradually becoming wealthier," said David Thurtell, an economist at Commonwealth Bank of Australia in Sydney. "As the economy becomes more market-based, incomes are going to increase, boosting demand for consumer goods. There's also a lot of construction going on. It's sucking in all sorts of commodities."

China's import binge began in 2000, when its economy was 13 per cent smaller and the impact on world prices less noticeable, according to Nicholas Lardy, a former Yale University China expert who is now a senior fellow at the Institute for International Economics, a research group in Washington.

As domestic demand rises and the nation drops import barriers, its role as a global customer can no longer be overlooked, he said.

"There's no one else that even comes close," Mr Lardy said, referring to the rate of increase in China's appetite for global imports.

"They've been a big driver of global trade expansion and a significant force in promoting the recovery."

This has boosted costs for US and European customers of the same commodities. US buyers of scrap metal are finding that prices have soared to US$130 a tonne from $70 just a year ago, said Joseph Innace, director of World Steel Dynamics, a research firm in New Jersey.

Pulp prices have risen by 13.7 per cent this year, lumber by 46.5 per cent, steel scrap by 27.6 per cent, rubber by 6.5 per cent, non-ferrous metals by 19.7 per cent, fibre by 15.3 per cent and chemicals by 2.6 per cent, according to Mr Mothersole. Such price increases won't have much impact on inflation in the US because normally only 10 per cent of commodity price gains filter through into producer prices of finished goods, he said.

"Strong Chinese growth is good for everybody," said Ira Kaminow, chief economist at Capital Insights Group, a Washington economic advisory firm. "It helps spur the world economy, and it will ultimately make China a better trading partner." The price increases are not all China's doing, he said. The economic recovery in the US and the rest of Asia are also pushing up commodity costs.

With some exceptions, China's buying has not helped US exporters. While the US bought $113.6 billion of Chinese goods last year, China purchased $20.1 billion in American-made products. The nation appears on course to boost its import buying from the US by more than one-fourth this year, according to Commerce Department statistics.

China is now the world's largest recipient of foreign investment, having attracted US$53 billion in 2002. It has increased its holdings of US Treasury bonds by $55 billion over the past three years, making it the third-largest foreign holder, and it soon will be second only to Japan.

"I don't see how [Commerce Secretary Don] Evans can go over there with a straight face and say they have a closed economy," Mr Lardy said, citing figures showing that China's growth in imports from around the world this year will exceed US$100 billion.