I have to ask: If you owed someone $1 trillion, bought more than $300 billion each year of their products (and only sell them about $70b), would you antagonize them into a trade war? If you're a pragmatic business person, or posses some moral obligation, you probably would not.

Should America just adopt Chimerica as our 51st state rather than start a trade war? While the US and China have a symbiotic relationship, certainly, this won't happen. If not the new state of Chimerica, why don't we step back and realize that the world has changed and China is an economic force to be reckoned. At the same time, we have deeply important economic ties that create Chimerica. That said, lest we forget that the USA has significant human and economic resource advantages over this 'developing country' therefore we should focus our energy on how to adapt to the new world order of Chimerica. 

We should be realistic and just concede some facts, including China has more people (4-1) more engineers (10-1), more University graduates (6 million to 1.5 million in 2009), and a significantly higher savings rate. I also wish that our treasury secretary would acknowledge that the Yuan has risen almost 25% in value to the US dollar in the last 5 years, and in this period, their exports continue to rise and GDP is double digits while keeping inflation relative. 

In an earlier CUBD blog  'Is it REALLY made in China' I note that the parts value of an iPhone in the US-China trade imbalance registers as $178 and the actual 'value' added by China is just $6.50. In the January 11, 2011 edition of the Wall Street Journal, editors also confirmed these figures and asked why would we start a trade war over $6.50? Likely the answer is because this week Chinese President Hu Jintao will visit with President Obama and with our inimitable Mr.Geithner trumpeting his currency manipulation mantra again, so it seems there is some chest thumping rhetoric in advance of these important meetings.

I'm still intrigued by these seemingly obvious facts: If we use the ubiquitous iPhone as an example let's really look at the impact of China's contribution to this economic equation and how we SHOULD deal with it:

Presuming the iPhone retailing at $299, the retailer/distributor margins (earned mostly by US companies) are $75 and Apple's margin is about $80.Therefore, about half of this retail price goes to US companies, their employees, and shareholders in some form. (Good for US economy)

Let's consider the derivative products and services of the iPhone in the market. Telecom companies like AT&T and now Verizon have profited by selling data services for iPhone, programmers are developing applications, musicians and artists receive royalties and companies are making and selling accessories. (Good for US economy)

Is it not obvious that the $6.50 in value delivered by China (assembly work that USA cannot do at this cost) actually benefits USA many times over? By studying other industries, you'll see that this iPhone example is not unique to the economic conundrum that the USA faces with China.

For now, Chimerica IS the new world order, and if we all stopped listening to politically motivated agendas or blaming someone else for our problems, I believe that Americans are smart enough to figure out more practical ways to reduce unemployment quickly by adapting to this new world order which will in turn spur new areas of economic growth.

I've been doing business in China since 2003, and I can state unequivocally that US businesses are more innovative, creative, more efficient, display better management skills and posses many other strengths that Chinese currently lack. It is time that we concede some parts of the economic food chain, and offer our value added services where they are sorely needed to create a win-win relationship with Chimerica and the new world order. This is a simple solution that truly benefits the USA for the foreseeable future.

Whether it is software development, design architecture, product design, management skill-set, medical technology of any innovative product or service that Americans bring as a unique talent, the USA has a yin-yang opportunity with China.

Regardless of your industry or company size, you should rethink your strategy to include Chimerica. Whether you take your company's ingenuity and combine it with China's labor arbitrage in sourcing, or reach their vast and ever growing consumer marketplace, consider integrating your plan to create your own Chimerica as it is here to stay.

Jeff Holtmeier

China US Business Development

(From Wikipedia: Chimerica was first coined by historian Niall Ferguson and economist Moritz Schularick in late 2006. They argue that saving by the Chinese and overspending by Americans led to an incredible period of wealth creation that contributed to the global financial crisis of 2008–2009. For years, China accumulated large currency reserves and channeled them into U.S. government securities, which kept nominal and real long-term interest rates artificially low in the United States. Ferguson describes Chimerica as one economy which "accounts for around 13 percent of the world’s land surface, a quarter of its population, about a third of its gross domestic product, and somewhere over half of the global economic growth of the past six years.”)

China has launched trading in its currency in the U.S. for the first time, an explicit endorsement by Beijing of the fast-growing market in the yuan and a significant step in the country's plan to foster global trading in its currency.

The state-controlled Bank of China Ltd. is allowing customers to trade the yuan, also known as the renminbi, in the U.S., expanding the nascent offshore market for the currency which began last year in Hong Kong.

The decision is the latest move by China to allow the yuan, whose value is still tightly controlled by the government, to become an international currency that can be used for trade and investment.

"We're preparing for the day when renminbi becomes fully convertible," Li Xiaojing, general manager of Bank of China's New York branch, told The Wall Street Journal. He said the bank's goal is to become "the renminbi clearing center in America."

Until the middle of last year, the buying and selling of yuan had largely been confined to mainland China by the country's strict capital controls. But in July, it opened the currency to trading in Hong Kong. Daily trading has since ballooned from zero to $400 million.

Bank of China limits the amount of yuan that can be converted by a U.S.-based individual customer to up to $4,000 a day. The restriction is designed to fend off speculation in the currency, bank officials say. But there is no limit, at least for now, on the amount that can be converted by businesses, so long as they are engaged in international trading. The bank has no restrictions on the ability by U.S.-based customers to convert the yuan back into dollars.

The loosening of restrictions on trading yuan started in Hong Kong, a former British colony under Chinese sovereignty but with its own legal and financial systems. Anyone with a Hong Kong yuan account is now able to trade the currency. Bank of China's move could further open up the currency to trading and attract Chinese companies with offices in the U.S.

Reference: WSJ

AS a national strategy, China is trying to build an economy that relies on innovation rather than imitation. Clearly, its leaders recognize that being the world’s low-cost workshop for assembling the breakthrough products designed elsewhere — think iPads and a host of other high-tech goods — has its limits.

So can China become a prodigious inventor? The answer, in truth, will play out over decades — and go a long way toward determining not only China’s future, but also the shape of the global economy.

Clues to the Chinese approach emerge from a recent government document containing goals for drastically increasing the nation’s production of patents. It offers a telling glimpse of how China intends to engineer a more innovative society.

The document, published in November by the State Intellectual Property Office of China, is called the “National Patent Development Strategy (2011-2020).” It discusses broad economic objectives as well as specific targets to be attained by 2015.

In a recent interview, David J. Kappos, director of the United States Patent and Trademark Office, pointed to the Chinese targets for 2015 and called them “mind-blowing numbers.”

According to a translation of the document provided by the patent office, China’s goal for annual patent filings by 2015 is two million. That number includes “utility-model patents,” which typically cover items like engineering features in a product and are less ambitious than “invention patents.” In the American system, there are no utility patents.

In 2009, about 300,000 applications for utility patents were filed in China, roughly equal to its total of invention patents, which have been growing slightly faster than utility filings in recent years. But even if just half of China’s total filings in 2015 are for invention patents, the national plan calls for a huge leap, to one million, by 2015. By contrast, patent filings in the United States totaled slightly more than 480,000 in the 12 months ended in September, according to the patent office.

China’s patent surge has been evident for years. In October, Thomson Reuters issued a research report, forecasting that China would surpass the United States in patent filings in 2011. “It’s happening even faster than we expected,” said Bob Stembridge, an intellectual-property analyst at Thomson Reuters.

Yet if the trend is not surprising, the ambition of the Chinese plan is striking. The document indicates, for example, that China intends to roughly double its number of patent examiners, to 9,000, by 2015. (The United States has 6,300 examiners.)

 “The leadership in China knows that innovation is its future, the key to higher living standards and long-term growth,” Mr. Kappos says. “They are doing everything they can to drive innovation, and China’s patent strategy is part of that broader plan.”

China’s strategy is guided and sponsored by the state. Should that be a source of concern for the United States, and perhaps a trade issue? Or is the plan likely to resemble past efforts by other governments to give their companies an edge in global competition?

In the 1980s, the Japanese government was widely viewed as the master practitioner of industrial policy, and Japan Inc. seemed poised to overrun one American industry after another, including computers.

As we know, it didn’t turn out that way, partly because of steps taken by the American government and industry. A semiconductor trade agreement was intended to pry open the Japanese market, and I.B.M. invested in a crucial but then-struggling supplier, Intel.

More important, however, Japan never became a force in a particularly unruly, imaginative side of computing: writing software. Generalizations are risky, but it seems that Japan, as a society, has not produced enough of that kind of innovative skill, despite being a formidable patent generator. (In that area, Japan is still slightly ahead of the United States by some measures, though Japan’s patent filing pace is slowing.)

To call Japan’s industrial policy an outright failure would be simplistic. In some industries — autos, machine tools and consumer electronics, for example — it has done quite well.

The Chinese patent strategy document is filled with metrics, right down to goals for patents owned per million people. It speaks of an innovation-by-the-numbers mentality, much like a student who equates knowledge with scores on standardized tests.

“It is a brute-force approach at this stage, emphasizing the quantity of innovation assets more than the quality,” said John Kao, an innovation consultant to governments and corporations.

But it would be a mistake, Mr. Kao said, to assume that China will necessarily follow a path similar to Japan’s. China, he says, is not only much bigger than Japan, but it also has a more individualistic entrepreneurial society, despite its Communist government. Someday, he predicts, China will have its entrepreneurial equivalents of Steve Jobs and Mark Zuckerberg.

DESPITE China’s inevitable rise, Mr. Kao said, the United States has a comparative advantage because it is the country most open to innovation. “American culture, more than any other, forgives failure, tolerates risk and embraces uncertainty,” Mr. Kao says.

Many innovative products and technologies, he says, will be made elsewhere. “But America’s future lies in being the orchestrator — the systems integrator — of the innovation process,” Mr. Kao said. “Look at Silicon Valley. It is a place where smart people from all nations, all languages and all ethnic groups come together. It’s the capital of innovation assembly.”

 NYT January 2011

BEIJING—China eased capital controls on exporters' foreign-currency earnings this weekend—a move that over time could damp inflationary pressures and slow growth in the massive foreign-exchange reserves that have made Beijing a heavyweight global investor.

The move, an expansion of a program that allows exporters to keep their foreign-currency earnings overseas instead of changing them into yuan, was announced Friday and took affect on Saturday.

Chinese exporters get almost all their revenue in dollars and other foreign currencies. In the past, they could use some of that money to cover foreign-currency costs such as imported materials for their factories, but they could use some of that money to cover foreign currency costs such as imported materials for their factories, but they were required to bring the remainder back to China and exchange it with the Central Bank for Yuan.

The system, which hails from a time when China was more worried about preventing capital outflows, has long vexed the country’s monetary authorities. While the influx has given China’s government huge global clout as an investor, it has also added to the slosh of money in the domestic economy at a time when China is trying to fight rising consumer price inflation.

WSJ January 2011

Visiting China was considered an indulgence for most financial executives just a few years ago.

But when Berkshire Hathaway Inc.'s Warren Buffett, J.P. Morgan Chase & Co.'s James Dimon, Kohlberg Kravis Roberts & Co.'s Henry Kravis and Carlyle Group's David Rubenstein all visited China in recent months, the trips were seen as something else entirely: crucial steps to keep their respective companies growing.

China has been important to global economic growth for years, of course. The country likely emerged as the world's second-largest economy in 2010. It is expected to show close to 10% growth in both 2010 and 2011.

Until recently, however, China was something of a sideshow for many financial professionals. Global growth was key to China's health, and the country had an impact on many economies. But China didn't seem to matter much to most deal makers and wealth creators.

That's all changing. China is opening its markets, slightly loosening the reins on its currency, and is emerging as a key to the future of almost every Wall Street firm. It's also a linchpin of the investment strategies of a growing number of hedge- and private-equity funds.

Consider that global initial public offerings of Chinese companies amounted to $104 billion in 2010, according to data-tracker Dealogic, up from $54 billion in 2009. Last year's tally amounts to $126 billion if Hong Kong companies are included, though it includes domestic markets not fully accessible to foreigners.

By comparison, less than $34 billion of U.S. IPOs took place in 2010, the second consecutive year that Chinese companies topped U.S. companies in IPO issuance. Bankers that didn't participate in Chinese IPOs risked seeing smaller bonuses. No Chinese investment bank has emerged as a global power, reducing alibis for not establishing a presence in deals available to foreigners.

Meanwhile, mergers-and-acquisitions specialists are racing to China to work with companies like China National Offshore Oil Corp., known as Cnooc, and China Petroleum & Chemical Corp., or Sinopec, among the biggest deal makers in 2010. Chinese companies completed 3,235 acquisitions valued at nearly $190 billion, or 9% of all global deals in 2010. That was more than any other nation except the U.S. and more than the $162 billion of deals by U.K.-based companies. China also was the second-most frequent target of purchases by foreign companies in 2010, after the U.S.

The Chinese economy is expanding so quickly it's helping to offset stagnant growth elsewhere in the world for a growing number of companies. Meanwhile, many private-equity firms are racing to cut deals in China, to tap into the nation's growth—and to demonstrate to clients that they're capable of finding opportunities in China.

Mr. Kravis's KKR is putting the finishing touches on a $1 billion fund to invest in fast-growing companies in China, its first China-focused fund after several years of investing in China through broader funds. Rivals like TPG and Carlyle, which have long has been active in China, are stepping up activity. TPG recently announced plans to raise two Chinese currency-denominated funds, each sized at more than $700 million.

To be sure, a number of private-equity and hedge-fund chiefs privately share frustrations about China, even as they search for local opportunities. The rule of law is weak, some say, making it harder to resolve disputes. Others question the reliability of data published by private and public bodies, or aren't sure who controls Chinese companies, which usually are influenced by government officials.

Still other private-equity executives worry that assets in the eastern part of the country are so picked-over that they're heading to central and western hinterlands to find opportunities.

"The western region's growth is accelerating, thanks to rising demand for and rapid development of resources and related industries," Nomura says.

The question for 2011 and beyond is whether Chinese authorities can keep the country growing apace, even as they press the brakes on inflation, which is growing at a clip of more than 5%. Strong future growth may come only if Chinese leaders can transform the nation into a consumer-focused economy.

"The transition to a consumer society in China represents the single biggest challenge for the global economy," says Perella Weinberg's Mr. Arbess,  "and the biggest opportunity for markets."

 WSJ January 2011

As we have discussed in previous CUBD blogs, the US tends to put forth a distorted view of the trade imbalance with China based on calculations that don't add up.

Recently, two academic researchers estimated that one such product, the Apple iPhone added $1,9 BILLION to the US trade deficit with China. This figure is based on traditional ways of measuring global trade but fail to reflect the complexities of global commerce where the design, manufacturing, part procurement and assembly of the products involve several countries.

Therefore, the entire $178.96 estimated wholesale cost of the shipped phone is credited to China, even though the value of the work performed by the Chinese workers at Foxconn accounts for just 3.6% ($6.,50) of the total, the researchers calculated in a report this month,

This is not specific to hi-tech products, but to how imports and exports are measured, which in turn can have real world consequences, evidence by the recent trade war spat between China and US.

Recently, Chinese Premier Wen Jianbao cited that trade tensions are overblown,,,,

With all of the economists at our disposal, how about a little due diligence???

Some content derived from WSJ.com

China's economy will expand by 10% in 2011, and inflation will remain moderate with the consumer price index (CPI) rising 3.3%, a top think tank predicted on Tuesday. The Chinese Academy of Social Sciences (CASS) said in its annual Blue Book of China's Economy report that the economy will grow by 9.9% in 2010 and will retain relatively rapid growth, with the GDP growth rate reaching 10 % in 2011. The think tank also said that the intensity of the government's macroeconomic policies will remain stable, while the country's fixed-asset investment growth is likely to slow to 20% in 2011 from an estimated 23.5 % pace this year. However, some economists disputed the conclusions of the CASS report, predicting that the national economy may face a modest deceleration next year while inflation is likely to rise faster than expected.

Source:China Daily

Dec. 7 – China recently released a circular allowing foreign capital involvement in China’s medical institutions sector for the first time. Specialists believe the new policy will have a significant impact on the country’s ongoing reform of the medical industry.

The Chinese State Council forwarded the “Circular on Further Encouraging and Guiding Social Capital to Investing in the Foundation of Medical Organizations” on November 26, and gave permits to foreign enterprises to establish both profitable and non-profit medical institutions in China. The circular clarifies that China will offer favorable policies to Hong Kong, Macau and Taiwan investors who are interested in founding medical institutions and also encourages all kinds of foreign investment in medical organizations across China’s middle and western regions.

The circular says China will gradually relax restrictions on foreign share proportions in jointly invested medical institutions, and will finally open up the market to wholly foreign-owned medical organizations after first opening up several trial locations.

The government will simultaneously simplify the licensing procedures for foreign investors interested in establishing medical organizations. According to the circular, jointly-invested medical institutions need to get approval from provincial authorities, while wholly foreign invested medical organizations need to apply for a license from China’s Ministry of Health and Ministry of Commerce.

China’s medical sector is a field which foreign investors have been interested in for a long time. According to a 2009 report on CBN, a Chinese financial newspaper, China started to see foreign investment into special clinics and medical facilities in the early 1990s. However, foreign investors slowed down in 2005 when China’s public hospital-focused medical reform was widely criticized as “a failure” – leading to a surge in the price of medicine and other social problems. It was not until 2009 that China published the new plan of reform encouraging the entrance of “diverse investors” into the public health sector while ensuring fundamental medical services from public hospitals to the people.

In addition to foreign capital, the circular also welcomes private and social capital entrance into China’s medical institutions sector.

Analysts believe the new policy will improve service and management across the sector by introducing more competition to the market. Wang Jishan, vice president of the People’s Hospital of Peking University says the new policy will bring more opportunities for both hospitals and doctors.

“Doctor mobility will grow and doctor salary will see an increase too,” he added.

Asia Briefing

Zhou Xiaochuan, governor of the People’s Bank of China, believes that the openness of debt capital market will greatly contribute to the foundation of a more mature market-oriented economy at a time when China expects more speculative investment inflow after the second round of quantitative easing by the U.S. Federal Reserve.

Zhou cast his “pool” theory on November 16 while attending the China Global Debt Capital Markets Congress co-hosted by the People’s Bank of China and the National Association of Financial Market Institutional Investors, in response to the concern of hot money inflows. Zhou said that China hopes to build up a “pool” where most of the speculative capital flows, instead of letting the excess money flood into the country’s real economy.

While people wonder whether the pool should be placed in the stock or real estate market, the two major markets where the speculators seem most likely to go, Vice President Ba Shusong of the State Counci’s Research Center of Finance says it is more possible that China is building up the pool in the bond market.

When compared to the fluctuating stock and real estate markets, Ba believes that the stable bond market, if reformed and regulated to attract most of so-called hot money, will work better for the future development of China’s real economy. Ba also points out that although it usually takes longer for the bond market to have massive profit return, a “pool” in this market supported by new opening-up policies will still be attractive to investors since there are no legal channels yet for foreign speculators to invest in China’s stock or real estate markets. Ba suggests the pool should be a special area in the bond market selling distinct bond products to foreign investors.

Zhou Xiaochuan also expressed his concern for the excessive administrative regulations in China’s debt capital market. He says the government needs to reduce redundant intervention and carry on with market-oriented reforms to ensure the robust development of the country’s debt capital market. Zhou also confirms that China’s bond market should primarily be an over-the-counter market and mainly deal with institutional investors.

China’s bond market is growing into the second largest in Asia, and the world’s sixth, but Zhou points out that the market desires more development in risk control, diversity in financial products and institutional investors, market liquidity, market-oriented pricing, credence evaluation and regulations.

The government needs to improve the efficiency of bond issuing to meet the massive demands in the future open market, a banker working in a major investment bank told Sina.com.

India will overtake Japan as the world’s third largest economy and China will be nearly double the size of the United States by 2030, according to a reportreleased by Standard Chartered on Monday.

The report’s researchers expect China’s economy to hit US$73.5 trillion and India’s to reach US$30.3 trillion as the global economy reaches US$308 trillion in nominal terms by 2030. Such levels would represent massive share increases for both economies – China would account for 24 percent of the world’s economy, up from 9 percent currently, and India would take up 10 percent, up from 2 percent.

“China has grabbed the attention, and rightly so. It is experiencing an industrial revolution, spearheaded by its phenomenal infrastructure investment. But India, with democracy, entrepreneurship, contracts and property rights, has much going for it too, plus a young population,” the report said.