Hu Jintao will be in Washington later this week to attend a summit of 20 major economies to discuss the financial crisis.  During that time, a meeting with President-elect Obama will most likely occur.  Many wonder what the election of Barack Obama is going to do to China-US relations and China-US trade.  The world as well as President Hu are hoping for warm relations with the newly elected President, however, President-elect Obama has a few requests of the Chinese government.

Obama told the American Chamber of Commerce in China that his prescription for the relationship is “China must make some basic adjustments if it is to continue sustained, shared economic growth”.

“It must develop practices that are more environmentally sustainable and less energy-intensive, that boost domestic consumption as an engine of growth, that enhance the social safety net, and that encourage indigenous technology innovation.

“America and the world can benefit from trade with China, but only if China agrees to play by the rules and act as a positive force for balanced world growth.

“I want China’s economy to continue to grow, its domestic demand to expand and its vitality to contribute to regional and global prosperity. But China’s current growth is unbalanced, and in recent years domestic consumption has gone down as a percentage of gross domestic product.

“To increase internal demand, Beijing will have to improve substantially its social safety net and upgrade its financial services sector to bring its consumption in line with international norms.”

And Obama pledged to “use all the diplomatic avenues available to seek a change in China’s currency practices. Because it pegs its currency at an artificially low rate, China is running massive current account surpluses.

“This is not good for US firms and workers, not good for the world, and is ultimately likely to produce inflation problems in China itself.” (news.com.au)

As you can see, Mr. Obama is not about to play nice with China.  Trade volumes have increased more and more since China opened its doors in the late 70s.  Since then, some of the major issues outlined by Mr. Obama have been swept under the rug by many U.S. policy makers.  It looks as if that is about to change.  The meeting later this week will hopefully shed more light on the future of China-US trade and relations.

Many ask us about the United States’ current economic situation and how it is affecting and how it is going to affect business with China.  Even though spending is going to drop in the U.S., that does not necessarily mean that Chinese manufacturing is going to be affected negatively.  Many that we have spoken with believe that it is actually going to increase the need of Chinese trade and manufacturing because of the lower prices.  There are still many companies in the U.S. that have not taken there business overseas.  This may be the time that the lower manufacturing and trade costs that the Chinese system presents may be of enough worth to take the leap across the Pacific Ocean.  

Something else you may consider is that U.S. exports to China have recently hit an all-time high.  In 2007, U.S. exports to China hit $65 billion ($85 billion if you include Hong Kong).  From the year 2000, exports to China have increased by over 300%.  During the same period of time, U.S. exports to the rest of the world have only increased by 50%.  Currently, the United States only exports more to its closest neighbors, Canada and Mexico.  

Only time will tell, but Chinese trade with the U.S. is probably not looking to slow up any time soon.

I had the wonderful opportunity of attending the Olympic Games in Beijing, China.  It was a once in a lifetime experience that I will never forget.  I was able to attend several events, also including the Opening and Closing Ceremonies.  During my extended time in China, I was able to pinpoint several strengths of the Chinese people that has contributed to their economic successes.

1)  Strong work ethic - I was staying at an extremely nice hotel, and I swear that some of the workers were there 24 hours a day and 7 days a week.  I would often ask workers in retail stores what there work hours were like, and they often told me that they worked from 10AM to 10PM, seven days a week without a day off.  For you math majors out there, that is 96 hours a week.  Chinese manufacturing is not just advantageous because of the exchange rate, but also because of the amount of time that they are hard at work.

2)  Strength in numbers - I would often be eating in a restaurant and realize that I had more than one server assigned to my table.  They would often stand a few feet away from the table and just watch me eat. It seemed as if they had no other table that they were assigned to.  Everywhere you went, it felt like there were as many workers as there were customers.  This is one of the most important strengths of Chinese trade and manufacturing.  More hands make light the work, and more hands means more production.

3)  Payment based performance - If the person was a street sweeper, bellman at the hotel, server at the restaurant, or volunteer at an Olympic Venue, their work ethic was always extremely comparable.  For those of you that have been to China, you know that tipping is not accepted by almost all trades.  They do not work harder because they are going to get paid more.  Some often question the quality of Chinese products because they are made at such a “cheap” price, but I can tell you right now, the person on the floor is working just as hard (if not harder) as the manager that is probably making more money.

On July 21, 2005, the Renminbi’s(RMB) peg to the U.S. Dollar was removed.  The RMB now fluctuates to a managed floating rate based on market supply and demand with connection to a combination of other foreign currencies.  Once the peg was removed, RMB revalued to 8.11 to every USD.  Since then, the RMB has continuously strengthened against the dollar, now trading at around 6.85 RMB per USD.

The more the dollar weakens, and the more the RMB strengthens, the more expensive China Manufacturing becomes for U.S. companies.  The United States has continuously reaped the rewards of cheaper manufacturing costs in China, but if this trend continues, this market advantage will not be as great as it is today.  Many talk about the need to bring some of this manufacturing back to the U.S., but we absolutely cannot compete with Chinese manufacturing costs right now.  We must take advantage of China manufacturing while we still can.  The manufacturing cost in China has a great effect on the price of goods in the U.S.  The USD to RMB exchange rate is something that we must always keep a close eye on.

From the beginning, it was clear that the Chinese believed that the Olympics would have an enormous impact on the Chinese image, economy, and trade.  PRC Premier Wen Jiabao said earlier this year that the Olympics in China provided an opportunity to display to the world how “democratic, open, civilized, friendly, and harmonious” China is.  The monetary investment on the Games is staggering.  

Those investments include:

• $40 billion on the infrastructure alone from 2002-2006
• $1.1 billion on transportation improvements, including expanding Beijing’s subway system, completing the city’s light rail system, and constructing and refurbishing 318 km of city streets.
• $200 million to demolish old housing and urban buildings
• $3.6 billion to transform Beijing into a “digital” city
• $12.2 billion to improve China’s environmental issues

(Statistics found in The China Business Review, ”The 2008 Olympics’ Impact on China”, by Lee M. Sands)

This is obviously just a fraction of the major spending, but China’s investment cannot be overlooked.  Will this investment bring more tourists, more foreign direct investments, and higher trade volumes?  It is too early to tell, but my guess is YES.  The international viewing audience for the Games was enormous, and the consensus from those viewers was extremely positive.  The Chinese have never been looked at in such a positive light.  Expect China trade volumes, FDI, and tourism to continue to grow at exponential rates.