Thought-provoking book tackles the China conundrum

In April I attended the spring meeting of the Counselors of Real Estate (CRE). Much of the conversation focused on interest rates, energy costs and inflation as well as the graying of the U.S. population and other changing demographics. It was only after I returned home that it occurred to me that I didn’t hear as much discussion about offshoring and foreign competition.

One evening I went to the bookshelf in my study and pulled down a new book to read. It happened to be “China Inc.: How the Rise of the Next Superpower Challenges America and the World” by Ted C. Fishman. Fishman was a securities analyst and then a financial writer and columnist. He has spent extensive time in China and he raises many thought-provoking questions.

For the United States, China is a conundrum. We love the low-cost consumer goods it manufactures and sells to us at the same time that it draws jobs like bees to honey. There is no question that China is very important to all of us, given its 1.5 billion population and its potential to manufacture just about everything. For many years China has chosen to reinvest its surplus of U.S. dollars in U.S. treasuries, stocks and even real estate.

Here we find another irony. China’s willingness to buy America’s debt has kept interest rates low, but it has lured us into continuing to increase personal debt and spend the borrowings on consumer purchases. While this provides a short-term boost to the consumer economy, it has a long tail. This is of special concern, given that much of the consumer debt is variable interest rates. Last week I spoke with a woman who purchased a property three years ago. She reminded me that I advised her not to go for the variable rate financing. She did. While she started at 4.2 percent, her annual ARM is about to go to 7.3 percent — ouch! We are seeing these same trends in commercial loans as well.

“China Inc.” should be on your summer reading list. It is very well written and tightly focused. It is thought-provoking but its 12 tight chapters flow very well. Here are some quotes to whet your appetite:

• “Thus, while the rest of the world worries about the power of China’s best factories to kill off jobs, the Chinese themselves must worry about how competition in their own country is spiking unemployment … All these reinforcing factors — rural poverty, huge internal migration, liberalization of financing, a self-cannibalizing frenzy of competition, intensifying urbanization — speed the high metabolism of Chinese Capitalism.” (pg. 75)

• “GE recently opened a giant industrial research center in Shanghai … China will produce 325,000 engineers this year. That’s five times as many as in the U.S., where the number of engineering graduates has been declining since the early 1980s and where 40% of all students who enter universities on the engineering track change their mind.” (pg. 217)

• “In fact, in the U.S. between 1998 and 2004, prices fell in nearly every product category in which China was the top exporter. ‘The manufactured goods that have dropped in price the most are those made by China,’ says, Michael Cox, chief economist for the Federal Reserve Bank of Dallas, citing figures assembled by the bank for its 2003 annual report, published in 2004. Personal computers, the most outstanding example, dropped by 28 percent.” (pg. 255)

• “China lends America all the money it needs to spend itself silly. Not that China plays this role alone. Japan is also a huge creditor to the U.S. Much of the rest of the world plays a role too. Foreigners now own 40 percent of all U.S. treasury securities, while total U.S. debt to foreigners tops $2.2 trillion.” (pg. 265)

• “Nevertheless, the Congress, the president, and the collective voices of industries, communities, and workers have not pushed the U.S. any closer to a comprehensive view of what in the near and long terms America must do to prosper as China grows. Instead there seems to be growing uncertainty in the U.S. about what China means for America’s future.” (pg. 306)

I assure you, you will find this book thought-provoking, stimulating and more than a little unsettling. Enjoy.

Bill Norton, president of Norton Asset Management, is a Counselor of Real Estate (CRE), a Fellow of the Royal Institution of Chartered Surveyors (FRICS) and a member of the board of The Initiative for a 20/20 Vision for Concord. He can be reached at wbn@nortonnewengland.com.