There has been a good bit of coverage regarding the SAIC, the Chinese Auto group, and its expressed interest in buying troubled US Auto Makers. Except for the “I think they are making just about everything we buy here” global thoughts, I don’t know much about the economy, so I turned to a recent publication and found some interesting stuff.

From the Congressional Research Service, Sept. 18, 2008, “China’s Economic Condition”

• US trade deficits with China rose from $10.4 billion in 1990 to $256 billion in 2007

• The largest sector for Foreign Direct Investments to China in 2007 was manufacturing, which accounted for about 55% of the total FDI. The Chinese government estimates that through June, 2007, it had approved over 610,000 foreign funded companies and that 28 million people were employed by such firms(there are an est. 918 million working age adults in China)

• Merchandise trade surpluses, large-scale foreign investment and large purchases of foreign currencies to maintain its exchange rate with the dollar and other currencies have enabled China to accumulate the world’s largest foreign exchange reserves….rising to $1.8 trillion in June, 2007.

• ..it is estimated that Chinese exports to the United States as a share of total Chinese exports totaled 33.6% in 2007….Foreign-funded enterprises were responsible for 57% of Chinese exports in 2007. A large share of these FFEs are owned by Hong Kong and Taiwan investors..a large share of the products made by such firms is likely exported to the United States.

• The average labor cost per hour in China was $1.35, compared with $24.50 in the United States in 2006. (Remember this “average labor cost” – not median)

• The single largest percentage item of Chinese manufactured goods imported into the US in 2007 was: Electronic integrated circuits and micro-assemblies or parts thereof.

• China is now the world’s second largest consumer of oil products at 7.8 million barrels per day in 2007.

• In 2000, China’s leaders initiated a new ‘go global’ strategy, ..encouraging firms (esp. state-owned enterprises) to invest overseas. They have even created the China Investment Corp. to manage its foreign exchange reserves to invest.

• The government is increasingly interested in buying/developing international brands: in April, 2005, a Chinese computer company, Lenovo, bought IBM’s personal computer division. In June, 2005, Haier Group made an unsuccessful bid to take over Maytag.

There are many challenges to the Chinese government in terms of economic development in terms of their banking system, currency policy and so on. But one of the largest is growing unrest. In 2005, there were reported 87,000 protests, many of which became violent over issues such as pollution, corruption and land seizures. A 2005 UN report claimed that the income gap between urban and rural areas is among the highest in the world and threatens social stability. There is a widespread perception that the benefits of the growing economy have missed outlying areas.

What implications does all of this have for us? As US companies come under increasing pressures in the economic climate we currently have, we will see more and more movement from Chinese State-owned organizations (such as SAIC) to use the government’s foreign exchange reserves(i.e., US Debt) to purchase US technology and brands. China HAS an economic and industrial policy in terms of investing and and developing technology (their total dominance in terms of developing aluminum and then turning it to the recreational bicycle business is just once example).

The question for the US is: Are we interested in having an economic and industrial policy that does the same and can somehow keep our technology out of the hands of foreign owners, particularly ones who are now expressing interest in doing things like buying air craft carriers?

Chinese Economy