CDC Corporation

CDC Corporation is a NASDAQ listed security that has been trading in a range between $4.09 and $11.45 over the past year. With 114,944,200 shares outstanding, a recent price of $9.03 gives a total market capitalization of $1,039,095,564. While there are certainly larger companies, CDC Corporation has definitely earned its place in the pack. Last year, CDC Corporation created $0.10 in earnings for every share outstanding.

CDC Corporation is currently priced by the market at 98.10 times last year’s earnings. Many trading multiples around the world are quite attractive these days, but don’t be fooled. A Price to Earnings ratio of 0 simply means that the security didn’t make any money last year.

With a share price under $50 a share and earnings per share below $1 a share, CDC Corporation could be an interesting value proposition. Consistent earnings are the key to high valuations and this security is well on its way.

Dyadic International, Inc.

Dyadic International, Inc. is an AMEX listed security that has been trading in a range between $3.65 and $7.10 over the past year. With 29,939,370 shares outstanding, a recent price of $5.30 gives a total market capitalization of $158,678,667. While there are certainly larger companies, Dyadic International, Inc. has definitely earned its place in the pack. Last year, Dyadic International, Inc. created $-0.44 in earnings for every share outstanding.

Dyadic International, Inc. is currently priced by the market at 0.00 times last year’s earnings. Many trading multiples around the world are quite attractive these days, but don’t be fooled. A Price to Earnings ratio of 0 simply means that the security didn’t make any money last year.

With a share price under $50 a share and earnings per share below $1 a share, Dyadic International, Inc. is unlikely to be an interesting value proposition.

Allegheny Technologies, Inc.

Allegheny Technologies specializes in exotic metal alloys and stainless steel. Still headquartered in Pittsburgh long after many of the other major steel manufacturers left town, the company has a proud history stretching back to Revolutionary times.

While centered in Pittsburgh, the company has recognized the realities of globalized production of steel and has opened plants in China and Europe. The corporate concentration on more exotic metals is intended to partially shield the company from international competition, but rapidly developing international competitors with significant government backing are a fact of life in the industry.

Allegheny Technologies is in the awkward position of asking for large government subsidies or protection from international competition in order to make its business more tenable. While a Democratic Congress will quite certainly be more amenable to worker-friendly trade restrictions, labor unions have reached their nadir in recent years. Without political favoritism, big steel may simply no longer be economically feasible in an environment of significantly higher labor costs.

China displaces French Colonial Power in Africa

The IHT reports that France's residual influence in its former colonies in Chad and throughout Africa is being replaced by Chinese interests. This is a somewhat surprising development because the French worked diligently for decades to prevent perceived American hegemony. The Chinese, on the other hand, have moved in largely under the radar and have shown a disturbing willingness to cooperate with local warlords in order to ensure access to natural resources.

In one sense, the Chinese role in supplanting French interests reflects a growing awareness by the West that outside interventions are ultimately of only minimal value in fostering the kinds of free and open society's that can grow organically without relying solely on extracting mineral resources and heavy foreign investment. Despite enormous humanitarian efforts to fight HIV/AIDS, Africa remains an international basket case. Despite cumulative investments from the West totalling more than $1 trillion over the past half-century, Africa has been unable to show sustained progress.

Unfortunately for Africa, the Chinese influence that is replacing traditional Western powers is largely a reflection of a desire for access to natural resources. Because the Chinese notion of soft power rather conspicuously excludes any encouragement to improve local institutions, the despots and kleptocracies that have taken root in Africa will not be dislodged by outside influence. In particular, American attempts to discourage corruption and demand accountability have already been thwarted by Chinese money that comes without those onerous restrictions.

Chinese hegemony is obviously good for the Chinese, but Chad and other African countries will not be helped by an international environment that allows them to sink or swim on the basis of their own decisions.

Rupert Murdoch Fights for the Wall Street Journal

The IHT reports that Rupert Murdoch has had his first face-to-face meeting with the Bancroft family that controls Dow Jones and Co., which Murdoch has offered to buy. The family previously rejected his bid outright over concerns that Murdoch would interfere in editorial decisions at the Wall Street Journal.

Rupert Murdoch has a long history of altering and even suppressing news reports critical of the Chinese government in order to curry favor with the Communist Party. Murdoch has yet to make a media fortune in China, but his ethnic Chinese wife is spearheading News Corp.'s expansion into China.

The meeting itself was inconclusive, but both party's have agreed in principle to additional talks. The Bancroft family presented a proposal that would prevent Murdoch from effectively controlling the editorial side of the Wall Street Journal, but Murdoch rejected that immediately. Mr. Murdoch's own proposal is a quasi-independent board with some of the members appointed by him.

The proposal was supposedly well received by the Bancrofts but the chairman of Dow Jones, M. Peter McPherson, voiced objections.

The proposal is eerily similar to the governing board that was set up when Murdoch purchased The Times of London. That board allowed Murdoch to force out editor Harry Evans without any serious objections.

Murdoch's proposal is clearly the most financially remunerative option available to the Bancroft family. Murdoch's bid is 60% higher than the previous market price and his other media properties offer obvious synergies.

If the Bancroft family decides that it values the editorial integrity of the nation's financial press more than cold, hard cash, the family would be well advised to solicit a competitive bid from GE/NBC. GE/NBC has a long history of media coverage that would be more in keeping with the Bancroft family's ideals. While many view NBC as the most widely leftist media giant, against the grain of the traditionally conservative Wall Street Journal editorial board, GE has long exhibited the ability to ignore editorial viewpoints as long as profits rise. Because NBC's CNBC property is the likely victim of any alliance between the Bancrofts and Murdoch, NBC's investment in Dow Jones would also offer great synergies.

Did Alan Greenspan cause the Chinese stock market to collapse?

Former Fed Chairman Alan Greenspan famously warned against "irrational exuberance" as the dot com bubble neared its peak, but nothing he did succeeded in doing over the next year stopped the bubble from popping disastrously. Now that he has moved into the private sector as a consultant writ large to the world of wealthy investors concerned about the direction of the global economy, Greenspan sees another bubble on the horizon: China.

China's stock market has been growing like crazy over the past year and a half. While the underlying economy of the nation has witnessed a spectacular 10% growth rate, the stock market has soared ahead. The Chinese stock market more than doubled in 2006, and rose more than 50% from there at the beginning of 2007.

Alan Greenspan's initial comments about the Chinese economy sparked an immediate drop in the Chinese stock market that reverberated around the world. In a global economy increasingly independent of the influence of the United States, many investors feared that an unorderly collapse of China's markets could destroy prospects for global growth this year.

Now that investor's have had enough time to digest Greenspan's analysis and react accordingly, it is clear that Greenspan was on to something with regard to China. China's stock market has fallen back significantly from its heights and the rest of the world economy has shrugged off China's downturn.

Greenspan spent years at the head of the Fed in a position to access information most investors can't access. But his current role as consultant doesn't offer him any information not available to others. Rather, Greenspan has simply pointed out what everyone should have already known.

Alan Greenspan couldn't stop the dot com bust, but now that he is out of power, his influence has actually grown. No longer confined to economic doubletalk so incomprehensible that the press dubbed it "Greenspeak", Alan Greenspan can finally speak his mind. Many pundits in the financial press and his successors at world financial institutions are concerned that Greenspan is just trying to make a few bucks now that he is no longer the world's chief financial guru. It seems like Greenspan may regain much of the luster he lost with the last recession at the expense of another downturn overseas.

Competition with China

Mexico appears to be losing ground in U.S. markets. Its share of U.S. imports peaked at 11.5 percent in 2001 and has slipped since then. Meanwhile, China’s share of U.S. imports has grown steadily and now exceeds Mexico’s. To Mexican officials and producers this is no mere coincidence, China’s gains are being made at Mexico’s expense. China’s exports-to-GDP ratio has risen from 2 percent to 25 percent since 1970. While China’s GDP has grown at about 10 percent a year in real terms over the past 20 years, exports have grown twice as fast. Not only is China producing more than ever for export, its ability to access U.S. markets is improving with the expansion of free trade. China is making strides in many areas important to Mexico. However, there is little correlation between China’s gains and Mexico’s losses. There are many markets in which China is gaining a lot of ground but Mexico is not losing any. In such areas as computers and electrical machinery, China’s gains are being made at other countries’ expense. There are also many industries in which China is making no gains. Whatever is happening to Mexico in those areas cannot be explained by China. Among these commodities are vehicles, vehicle engines and parts, agricultural goods and oil products.

There are, of course, industries in which China’s gains are associated with Mexico’s losses. These at-risk sectors, which include TV sets and textiles and apparel, have several characteristics in common. First, they are unskilled and labor-intensive, which makes China a very attractive place to produce. Second, commodities in these sectors tend to have a high value-to-weight ratio, which makes transportation costs reasonable. Third, many products in these at-risk areas are standardized and can be mass produced. But notwithstanding these sectors in which Mexico is most exposed to Chinese competition, there is overall little correlation between China’s gains and Mexico’s losses.

The countries that appear to be bearing the brunt of China’s competition are other Asian exporters. Japan, Korea, Taiwan, Singapore, Malaysia and Thailand have lost market share in many sectors since 1999, and the losses experienced by that group of countries have been highly correlated with China’s gains. This correlation between China and the Asian tigers is exactly what we would see for Mexico if China’s advance were happening at Mexico’s expense. Instead, Mexico’s recent export difficulties are best explained by Mexico’s dependence on U.S. manufacturing activity. When a deep manufacturing recession began in the United States in 2000, no other country was hit harder than Mexico. Intermediate and capital goods account for almost 80 percent of Mexico’s exports. Mexico is a key supplier for the U.S. manufacturing sector. China, on the other hand, remains predominantly a consumption goods exporter. This greatly mitigated the impact of the recent U.S. recession on China’s export sector and largely explains China’s and Mexico’s differing fortunes since 2000.

The real problem facing Mexico is that Mexico has yet to find a way to accumulate physical and human resources the way fast-growing countries do. Its educational attainments continue to markedly lag those of industrialized nations. Its institutions do not function well, which discourages investment. Mexico’s tax system raises little revenue, which makes needed infrastructure and education investments impossible.

Mexico’s failure to marshal its physical and human resources effectively is most dramatic when compared to the Asian tigers. South Korea’s investment-to-GDP ratio reached almost 40 percent in the late '80s, very high by international standards. Interestingly, foreign investment did not play a big role in this. The investment surge was financed through exceptionally high private and public domestic savings. By contrast, Mexico's investment rate, in spite of the recent influx of foreign money, has hovered around 20 percent for most of the past 30 years. South Korea's fastest growing resource has been human capital. In 1960, almost half the working population lacked a primary school education. Today, 70 percent of working Koreans have at least some secondary education. Mexico's achievements in this area remain dismal. A third of the working population has not completed primary school, and the country today stands roughly where Korea did 40 years ago.

Trade Liberalization and NAFTA

Following the crisis of 1982, the Mexican economy received praise for having “adjusted well”, but failed to achieve any significant momentum due to renewed struggles in 1985-86. Mexico’s response has been to implement a policy of labor “flexibilizacion”, or weakening collective labor bargaining, and widespread trade liberalization to take advantage of newly awakened international competitiveness. Since the 1994 implementation of NAFTA or the North American Free Trade Agreement, Mexico has signed twelve free trade agreements with such diverse nations as Japan, Israel, and Chile.

NAFTA is by far the most important trade agreement Mexico has signed both in the magnitude of reciprocal trade with its partners as well as in its scope. Unlike the rest of the free trade agreements that Mexico has signed, NAFTA is more comprehensive in its scope and was complemented by the North American Agreement for Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC). Given the overall size of trade between Mexico and the United States, there are remarkably few trade disputes, and even those few involve relatively small dollar amounts. These disputes are generally settled in World Trade Organization (WTO) or NAFTA panels or through negotiations between the two countries.

While the trade agreement has not synchronized employment or productivity across North America, it has resulted in an enormous interdependence between Mexico and the United States. Even as the United States has been shifting much of its dependence for imports to other nations such as China, Mexico remains firmly dependent on the state of the United States’ economy. Exports now represent 30 percent of Mexico’s GDP, up from 10 percent 20 years ago. The great majority of Mexico’s exports are manufactured goods, and almost 90 percent of them are shipped to the United States.

While Mexico has undoubtedly benefited from trade liberalization, a history of bilateral trade agreements which Mexico has historically been able to join that other nations have been unable to access has resulted in a preferential place in world trade. Unfortunately for Mexico, the entrance of many nations such as China into the WTO and the United States’ aggressive moves to increase free trade worldwide is already working to erode that preferential trade status. While the economic case for free trade suggests that Mexico will ultimately benefit from reduced trade restrictions with other nations, Mexico is already beginning to suffer the early price of dislocation of many of its people. In particular, Mexico’s maquiladora industries face competition from China and Mexico’s rural poor face stiff competition from American agri-business.

One disturbing impact of increased integration into the global economy has been Mexico’s increasing wage inequality. The new economic reality of globalization has resulted in a substantial increase in the wage premium for skilled labor, which when coupled with an unequal distribution of skills has created higher inequality in the distribution of labor incomes that is closely associated to disparities in schooling.

As each of the Asian tigers achieves greater market penetration in the United States, Mexico’s export-dependent growth becomes more threatened. In particular, as tariffs against textiles from China expire, Mexico can expect to suffer financially. Yet Mexico’s real problem with trade liberalization is that it exposes an uncomfortable truth – that Mexico is no longer a relatively “poor” nation, but its institutions and human capital nonetheless remain unable to compete with “wealthy” nations.

The Washington Consensus and Asymmetric Growth

According to the program of economic reform known as the “Washington Consensus”, one of the expected effects of trade liberalization is a rapid expansion of exports from lesser developed countries (LDCs), including labor-intensive manufactures. The idea is that this will improve micro- and macroeconomic performance and stimulate overall growth, since the economy-wide behavior in LDCs tends to depend quite critically on what happens in the export sector. Yet for Mexico from 1981 to 2004 a remarkably dynamic growth of exports—non-oil exports grew, on average, at 13.4% per year—has been associated with a surprisingly poor growth performance of gross domestic product (GDP)—an annual average rate of just 2.1%. Furthermore, as population grew at 1.6% during this period, GDP growth became negligible in per capita terms. The resulting "asymmetric" or "unbalanced" growth has relegated the economic masterminds behind the Washington Consensus to the popular status of "peddlers of dreams".

The failure of Mexico to cultivate widespread economic growth in an environment of explosive export growth is the most unexpected outcome of the reform process begun by President De la Madrid. This failure is best explained by the growth of the “maquiladora” industry. The term "maquiladora" is used for firms that are highly labor intensive and end-of-value chain assembly-type operations. Proximity to the US and trade liberalization opened up opportunities to develop these type of activities, particularly in the frontier states with the US. The maquiladora industry is so dangerous as a model of economic development because there is no incentive to invest in increased labor productivity. By virtue of the nature of the industry itself and the characteristics of the labor market, capital can grow by simply adding more cheap labor. Between 1982 and 2000, the sector was able to absorb more than 1 million workers while not only successfully resisting upward pressure on wages, but actually pulling off a significant cut in real wages. Indeed, the industry also seems designed to minimize the creation of production linkages (forward and backward) with the rest of the economy. Since so many maquiladora companies are owned by foreign corporations, a large degree of “transfer pricing” or pricing with the intent of producing no profit for the local company probably occurs in spite of substantial tax concessions from the state. The lack of domestic linkages ensures easy international mobility, and anecdotal evidence abounds suggesting that Mexico has lost hundreds of thousands of maquiladora industry jobs to China in the past decade.

In 2000, South Korea had a manufacturing industry with a level of exports similar to that of Mexico ("maquiladora" and "non-maquiladora" manufacturing exports together)—about $150 billion; however, Korea had a manufacturing industry generating twice the level of value added and only using half the level of imports of Mexico. Furthermore, Korea had relatively low levels of manufacturing imports despite a substantially higher level of investment in machinery and equipment, which traditionally have a high import component. Considering South Korea’s disadvantages to Mexico with regard to the Washington Consensus Model, this is a startling outcome. Yet it is also explicable in terms of the comparative absence of the maquiladora industry in South Korea. Because capital in South Korea can only consistently grow in an environment of rising productivity, significant investments in worker productivity are encouraged. In contrast, Mexico provides the paradigm case for the failure of the neoliberal model advocated by the Washington Consensus.

One of the main reasons why investment performed badly after the reforms is precisely that capital could easily end up having little incentive to invest. In this new investor framework, as capital (domestic or foreign) can increase its accumulation rate (at least for a long period of time) either via stagnant wages (in sectors with productivity growth) or via shrinking ones (where there is none), why should it make a significant investment effort? Furthermore, if in the new equilibrium of the labor market, labor loses the property rights it had over the benefits that may derive from the use of this additional capital (increased productivity), labor also can end up having little incentive to acquire human capital. If all the benefits that might accrue from human capital accumulation go to capital, workers actually have a lesser incentive to invest in themselves.

China Shortchanges Its Poor

The IHT reports that while China is expected to continue its unprecedented streak of double digit economic growth, the communist nation has neglected vital social programs. The Organization for Economic Cooperation and Development issued a report that noted China's surging tax revenues have been outrunning growth in social spending. In particular, China has been engaging in a significant arms buildup aimed at Taiwan that has diverted tremendous resources from the rural poor.

The OECD predicts that China's surging exports will create an even larger trade surplus next year than its current record levels. This has enormous implications in the form of China's massive foreign reserves. Because the country has been sopping up excess liquidity by building foreign exchange reserves to prevent foreign direct investment from creating inflation, China has more than $1.2 trillion in foreign exchange.

China has recently committed itself to investing $3 billion in a US private equity group and talks about creating a national investment firm to invest its foreign exchange abroad in order to acchieve a higher rate of return.

China is an emerging economy with tremendous monetary resources. Nonetheless, in a country with hundreds of millions of people barely above subsistence levels, China could surely direct those resources more profitably toward its own citizens.

Airbus crackup benefits Boeing - Air France Splits Order

The Wichita Business Journal reports that Air France-KLM Group is splitting a $7.2 billion for new aircraft between Airbus and Boeing, with Boeing receiving the lion's share. The Airbus order is only worth $2.8 billion. This is enormously significant because of the French government's strategic interest in Airbus. Within the European model of developing "national champion" corporations that operate a significant share of their business for the benefit of their home country at the expense of higher profits, the move to order $4.4 billion worth of aircraft from Boeing reflects a growing realization that the troubles that have plagued the introduction of the Airbus A380 cannot be allowed to spread so far as to permanently damage the rest of French industry.

Boeing is not without its own difficulties in introducing its own "Dreamliner" aircraft, but the problems are clearly several orders of magnitude below Airbus's own.

It might be expected that Boeing would be gloating about its competitive success against Airbus, but company executives have been warning that the companies revenues could take a hit if the United States tries to realize a "peace dividend" following a pullout from Iraq. One executive even went so far as to speculate that as many as five major competitors could develop from countries like Brazil and India with the possibility of a Chinese corporation that could dominate the industry. While today this ranks as mere speculation, the undeniable truth is that the majority of the growth in the aircraft industry over the past few years has been in Asia. The development of a domestic aircraft manufacturer with government backing in China could cut into Boeing's long-term prospects.

Nonetheless, Boeing still intends to engage their Asian competitors - as if any other alternative would make any sense at this point.

China's Growth Comes at Environmental Cost

Businessweek reports that China's state media released data that show the country's environment is deteriorating.

While "spring sandstorms" helped to reduce air pollution by blowing the problem away from the area it was produced, the country's water supply continues its downward spiral. According to China's own "watered down" standards, less than 70% of major Chinese cities have water that ranks as "qualified". This is a drop of 5% from just a year ago. But the truly frightening truth of China's rivers and streams is obscured by these figures.

There have been a series of industrial accidents that polluted Chinese rivers which the government ineffectually attempted to cover up. One of the accidents was so bad that no amount of government intervention could disguise. The northeastern city of Harbin, with well over one million people, lost its only source of water when an industrial plant upriver completely poisoned the river with a massive dumping of benzene, a toxic chemical that is known to cause cancer.

China's political leaders are absolutely correct when they say that their efforts to clean up the environment are being effectively hamstrung by the need to continue economic growth. China's economy has grown faster than 10% per year for the last five years, but the country's primary competitive advantage in the international arena continues to be the availability of hundreds of millions of workers willing to work for almost nothing. China has made admirable progress in the urban areas that export to consumers around the world, but the countryside remains a decided work in progress.

The cleanest countries in the world are also the richest. This is no accident, as wealthy people are far more likely to pay to clean up their environment than the poor. China's problem is that the country has so many citizens trying to make a better life that they will irreparably damage their environment before they have enough money to repair their mistakes.

The environment has gained tremendous cachet in the West, perhaps most notably with the super trendy cleantech industry. China's growth is going to happen. At this point, only significant technological progress is going to enable that process to occur with minimal environmental disruption.

Asia's Foreign Reserves - A New Pool

Businessweek reports that a group of Asian nations who collectively hold 65% of the world's foreign exchange reserves has agreed to create a new "pooling arrangement" to help prevent fallout in the aftermath of incidents like the 1997 Asian Contagion that rapidly spread throughout the region. The group is motivated by the perception that the IMF, the global body usually acting as a lender of last resort in these types of scenarios, imposed conditions like higher interest rates and lower government spending in exchange for loans.

The first obvious implication of this unprecedented regional cooperation is that China, Japan, and the rest of southeast Asia are finally willing to cooperate without outside interference to advance their own interests. The continued economic dynamism of the region will ensure that an increasing share of the global economy will depend on the institutions constructed by the region. Despite the recent historical weakness of these financial institutions, this new multilateral endeavor indicates that the major players have internalized the importance of cooperation.

The second, far less positive implication is that much of the region, and China in particular, is interested in constructing a parallel global economic framework that embraces nonintervention in nation economics as a first order principle. The real concern here is that enabling despotic regimes such as Thailand, Myanmar, or even North Korea will result in humanitarian disasters. But just as frightening to the economies of the region is a commitment to not imposing fiscal reforms. The real causes of financial collapse are weak institutions and poor policy. By setting up an additional bulwark against failure before intervention by the IMF, this "pooling arrangement" is going to ensure that weaker, less wide-ranging reforms are enacted at the conclusion of each economic shock, making future failures more likely.

The good done by increasing political cooperation between these critical components of the global economy is at least partially offset by the purpose of their cooperation. The world would be much better off if China and the rest of the region put their reserves into existing institutions like the IMF in exchange for increased consideration. With the failure of the Doha Round at the WTO, the world looked immediately to bilateral agreements to continue trade progress. While regional cooperation is superior to earlier bilateral cooperation, only truly global cooperation will best advance everyone's interests.

China Raises Reserve Requirements to Fight Growth

The NYT reports that China finds itself in the rather enviable position of fighting to keep its already phenomenal growth rate from becoming excessive. So for the second time in just one month, the People's Bank of China has raised the requirement for how much of the deposits kept in major banks must be held in reserve. And changing the reserve requirements is not the only tool that China has been using to slow growth. China raised interest rates three times in the last year.

The problem China faces is that even with these adjustments, growth is unlikely to slow. China has a $46 billion trade surplus that doubled since just last year. And foreign investors have been pouring money in China's currency as they speculate that the government will have to let the currency strengthen. The stock market has been exploding, rising 130% in 2006 and about 40% so far this year.

Many intelligent people the world over have come to the conclusion that China's rise as a major economic power to rival and even surpass the United States is now a given. In this environment, the huge investments in China are justified, but they have bid down the expected rate of return well below the original potential of the market. The world is facing a level of capital liquidity that is completely unparalleled in history. This liquidity is ultimately a force for good, but a panic could turn this capital influx into an exodus.

The real question that most people are probably asking themselves is: "What's wrong with an economy that grows faster than 10% a year?" The straight answer is that there is nothing magical about growing that quickly that ensures the growth is the result of speculation and not underlying macroeconomic change. But growth of this magnitude has never been sustained before in human history. Economies that have been growing significantly more slowly have been gripped by speculative bubbles that sparked worldwide financial collapse. China treats 10% as the growth rate above which it chooses to be concerned, and with good reason. China's political structure is set up in such a way that continued economic growth is critical to social stability. If the economy stopped growing or even worse began to crash, the Communist Party would face troubles from the countryside that could loosen its grip on power.

Too much growth is actually more likely to cause economic woes for China rather than too little. A speculative bubble popping is the most likely bad scenario and China's steps are a reasonable movement to prevent that. Unfortunately for China, only a slowing world economy is likely to hold back China's export driven growth and outside of the United States, the economies of the world are doing better than they have in years. For once, America's housing bust might do something good for the world economy.

Reluctant Chinese Consumers

Businessweek reports that the Chinese government is concerned about the fiscal conservatism being demonstrated by its citizens. The Chinese have one of the highest savings rates in the world. Most people are socking away as much as 40% of their income each year. And the trends going forward don't look good. The share of GDP soaked up by private consumption is only 40%. This represents a fall from 48% as recently as 2000. To put this figure in perspective, US consumers spent 8 times as much on consumption goods even though there are only one-fourth as many Americans.

It might seem to some observers that saving a lot of money is really a good thing. And it certainly can be. The US savings rate has been hovering near zero and in fact gone negative for several years now. The problem is that only so much investment can be done at reasonable levels of profitability at any given time. In real terms, this means that every additional dollar saved goes into a slightly worse investment, because all the best investments get taken first. The cost of saving such a high percentage of income is ultimately personal privation. Foreign businesses have been trying to crack the China market for decades with little success. One reason is that the Chinese are simply much more price conscious than other consumers. By only purchasing a few, very low cost goods, the Chinese limit the marketplace by not rewarding manufacturers for catering to them.

The eternally optimistic in the world economic community envision a day when a great Chinese middle class finally starts spending and touches off a tremendous global bull market. And while continued economic growth on the level of 10% per annum makes such an eventuality much more likely, the sad truth is that a day like that is still far off in the future. For all the good press that China has been able to get in the media, the Chinese middle class only includes about 25 million people. Out of a total population well over 1 billion, it is clear that such a small minority is unlikely to move global markets anytime soon.

The real tragedy of weak Chinese consumer spending is that the quality of life of the average person in China is much lower than it could be. Most urban residents don't own cars and despite the best efforts of automakers, that won't be changing soon either.

The Chinese economic miracle is a wondrous thing, but it could certainly be a much more wonderful thing if it benefited the workers who have made it happen.

The Rise of China - Sooner than You Think

Businessweek reports that tax revenues in China are up 25.5% in the first quarter. The rising revenues are due to a combination of sharply higher profits as the economy continues to grow at about 10% per annum and a crackdown on tax evasion by Chinese officials.

China is using its rapidly growing revenue stream to fund big increases in spending across the board. Western military planners are concerned about big increases in Chinese military spending, but China is also spending big bucks on social spending to ease the yawning gap between urban and rural livelihoods.

By some measures, China is already a larger force in the global economy than the United States. But China's institutions and global standing have yet to make a commiserate rise. China's leadership attempts to hide behind the rhetoric of a "peaceful rise". The real truth remains that the Communist Party apparatus is ill-equipped to maintain its iron hold on a rapidly changing nation.

Most people in China today are just getting their first taste of real material progress. As long as powerful economic growth continues, the government will be able to keep a firm grip on its people. But growth at this pace has consequences beyond rising standards of living. The toll of rapid industrialization and mass consumer culture on China's environment and social stability will be immense.

It's a good thing that China is rising, indeed to suggest otherwise is to justify the continued impoverishment of more than a billion people. Let's just hope that China can manage the figurative minefield that awaits its citizens.