The New York Times The New York Times Business December 16, 2002  

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China's Hot, at Least for Now

By JOSEPH KAHN

SHANGHAI -- China's economy has defied the worldwide slowdown and continued its long streak of rapid growth, raising expectations that it has begun to pull its weight as an engine for Asia and the world.

With the United States, Europe and Japan all experiencing sluggish growth, China is now expected to expand by a robust 8 percent this year, fueled by a surge in exports, soaring foreign investment and a housing boom.

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Even if growth cools next year, as most economists predict, the country has begun to rival Japan as the pivotal player in Asia's economy. It has become the largest export market for both South Korea and Taiwan, for example, and has elbowed out Japan to become Asia's biggest exporter to the United States.

"China has already become the largest market for several East Asian countries," said Nicholas Lardy, a leading expert on China's economy at the Brookings Institution in Washington. "It has become deeply integrated with the region and to an extent is pulling all its neighbors along with it."

Over all, China's economy lags far behind those of Japan and the United States. Its output is about a quarter of Japan's and about a ninth that of the United States. Even if China continues to grow much more quickly, it will take until the middle of the century before it becomes the world's largest economy.

Beijing has also moved exceedingly slowly to tackle the woes of its state banking system and to dismantle money-losing state enterprises. The Organization for Economic Cooperation and Development estimates that both sectors will drag down economic growth the next few years. Some economists argue that bad debts pose a severe long-term threat to China.

Yet those problems have been around for many years, and they have not stopped China from beginning to realize its potential. This year, it appears set to attract a record $50 billion in foreign investment, multiples more than the amount received by any other developing country and perhaps more than the United States.

Much of this investment has gone into bolstering China's position as the world's assembly line. It is now a leader in almost every category of manufactured goods, from shoes to semiconductors.

China produces so much, in fact, that some economists say it has helped create a glut of industrial products that has undermined prices hurting profits but helping consumers around the globe. China's home market has experienced falling prices for five consecutive years. So far this year, consumer prices have declined 1 percent.

Fierce competition and falling prices have forced multinational corporations to move production lines to China, which can make goods for less than its Asian neighbors can. So, its growth has come partly at the expense of the region. Still, about half of its exports, or about $275 billion last year, consists of products made in China by foreign companies or joint ventures of Chinese and foreign companies.

China has also begun pulling in imports at a record pace. Under the terms of its entry to the World Trade Organization last year, Beijing agreed to reduce tariffs sharply. They now average 15 percent, about a fourth of their peak level in the 1980's. It must reduce them further, to 9 percent on average, by 2005.

One sign of its growing importance to the world economy: China passed the United States this year as the world's largest importer of steel, helping absorb some global overcapacity. China already produces more steel than Japan and America combined, but a building boom and a surge in auto production led to imports of 23 million metric tons in the nine months ended in September, compared with 22 million tons for the United States in the period.

Or consider Asia's tourist industry. The number of visitors to Southeast Asia from both Japan and the United States has fallen below the levels of six years ago, according to Singapore government statistics. But Chinese mainlanders are traveling like never before, with the number doubling the last six years and continuing to grow despite the terrorist attacks in 2001. 





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