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Stephen Dunphy / Times staff columnist
The China bubble

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In the spring of 1979, Liu Lin Hai steamed into Elliott Bay amid the cheers of a crowd and music from a Navy band.

For the first time in 30 years, a Chinese vessel had called on a U.S. port, and a long relationship between China and the Puget Sound area began.

One measure of the magnitude of what happened that day comes from trade figures. In 1978, trade between Seattle and China was valued at $49.8 million. In 2002, the latest year with complete statistics, the total was $15.2 billion.

According to my calculator, made in China, that's an increase of somewhere around 30,000 percent.

There are other changes, too. The Liu Lin Hai arrived empty and departed a few days later with a shipment of corn. Today's ships arrive fully laden with products and leave with high-tech equipment, manufacturing parts and a wide array of agricultural products. Boeing has sold billions of dollars in airplanes to China, although now it battles with Airbus for a half-share of new plane orders.

When trade began 25 years ago, there were the usual forecasts of growth, about the importance of the market for the state, about China's potential. But few then would forecast where we stand now with China.

China is growing so fast that its trade surplus with the United States continues to grow each month, making it a political issue that raises fears of trade restrictions. And a growing number of white-collar jobs are heading for China, an unexpected development that troubles the promoters of globalization.

"Washington and Beijing will have to collaborate more closely to manage bilateral trade or else the huge U.S. trade deficit with China will become a major election issue in the U.S., and not in a manner conducive to stable relations," said Joe Borich of the Washington State China Relations Council in a recent update for members.

One of the big questions as 2004 gets under way is whether China is growing too fast. It was the subject of a cover story in Business Week recently, and The New York Times splashed the idea across the top of its Sunday Business section several weeks ago.

A bubble is the big worry. Japan in the late 1980s was a bubble economy; at one point, the imperial grounds in Tokyo were worth more than all of the land in California. When that bubble burst, it ushered in a decade of recessions, unemployment and a stagnating economy.

When the dot-com bubble burst in the U.S., the economy fell sharply and grows now without creating new jobs.

China is in a much more fragile state than either of those two economies, making any economic dislocation all the worse for them — and for us.

Some economists believe China may not be growing as fast as the figures suggest. Kang Wu, a China expert at the East-West Center, a think tank in Honolulu, looks at power-consumption figures and concludes something is wrong.

"Either the figures are wrong, or China is larger than we believe," he said.

Power use usually has a strong relationship with growth, but the figures from China frequently either fall below growth levels or are well-above what would be needed for growth.

Wu tends to go with the view that China is a larger economy than the $1.2 trillion official figure makes it out to be. He also discounts claims China is growing so fast, it could overtake the United States as the world's largest economy in about 25 years.

A story last week quoted a World Bank economist who expects that to happen by 2030. World Bank data for 2002 put China's gross domestic product at $1.2 trillion compared with $10.4 trillion for the United States, making China the sixth-largest economy.

But put your calculator to the test.

If China grows at an 8 percent annual rate, its GDP will be $4.4 trillion in 2020 and $9.6 trillion in 2030. A 10 percent growth rate would yield GDP of $6.1 trillion and $15.7 trillion in those two years. If the U.S. grows at just 2 percent a year, its GDP hits $17.8 trillion by 2030.

China will have to grow at a 10 percent rate for the next quarter-century while the U.S. growth rate averages less than 2 percent for China to approach the U.S. in economic size.

This is not to take away from China's extraordinary growth, its emergence as a world industrial power called "the most profound social transformation in world history."

Check the skylines of Shanghai, Beijing and even interior cities like Chongqing, and you can see the growth. China devoured a third of the world's steel production last year, single-handedly boosting the prices of iron ore and nickel. It consumed more than half of the world's cement. It accounted for a third of the world's GDP growth, half of its growth in trade and more than half of its international direct investment.

But one recent study, using other Asian nations as models, indicates China can continue to grow for years before it reaches any kinds of limits.

Japan is the example in the immediate post-war period. Since then, the Asian "tiger" economies of Hong Kong, Singapore, Taiwan and South Korea have shown it is possible to continue to grow. The study of those economies showed countries can sustain fairly rapid growth until GDP measured per person hits about half the U.S. total.

Those figures on growth rates then become important. If the U.S. continues the trend of the past 50 years, GDP per person would grow at just about 2 percent a year.

Paul Markowski, a China expert based in New York, believes China's long-term growth will average about 6 percent a year per person — remember the huge population. It is then about 2040 before China hits the same limits that the other countries ran into.

China has its problems. Growth is accelerating too fast in several areas: real estate, some industrial production such as steel. It produces either runaway prices or overcapacity, neither of them good for the economy.

The banking system is weighed down by between 40 and 50 percent of nonperforming loans, most of them to former state-owned businesses that are having trouble competing in the global economy.

China has become the second-largest importer of oil, after the U.S., a sign of energy problems on the horizon. Wu, the East-West economist, says brownouts last summer are "happening all over." Intellectual-property laws are still lax; one estimate said 90 percent of the CDs and DVDs on sale in China are copies.

A bubble? Perhaps, but the signs so far are of an economy that can sustain itself for the foreseeable future.

Stephen H. Dunphy's columns appear Tuesdays-Fridays and Sundays. Phone: 206-464-2365. Fax: 206-382-8879. E-mail: sdunphy@seattletimes.com. More columns at www.seattletimes.com/columnists

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