A couple of weeks ago, I picked up The New York Times, and on the front page of the business section was a picture of one of the first buyers of a new $900,000 luxury car. The event was the Beijing Auto Show, and the buyer was a Chinese citizen, a 27-year-old real estate developer wearing a T-shirt and black cargo pants. It was a terrific story about globalization: The New York Times covering the sale of a German-made car in Beijing. People still debate the pros and cons of globalization, but, in my mind, it's largely academic because it's happening. The global economy is becoming more and more integrated and this will continue.
In China, economic growth has averaged nearly 10% a year since the economy first began opening in 1978. Many believe this can continue for some time, especially with China's increased focus on accessing global financial markets. China's economy has reached a critical mass and become a true regional economic superpower, able to drive commodity prices worldwide and reinvigorate much of the Asian economy.
Recent studies show that China imported 27% of the global supply of iron ore last year and consumed 40% of the world's cement. Estimates indicate that foreign companies sold more than US$220 billion of goods in China in 2003, up from roughly US$40 billion in 1994. And China's record consumption of oil is a significant factor in keeping prices around $40 a barrel. It's been reported that, on average, Asian exports to China grew 40% last year.
The export economies of South Korea, Thailand, Indonesia and Japan are all benefiting. After the US, China is now Japan's second-largest trading partner. One of the factors driving China's expansion has been extraordinary investments in its infrastructure, such as:
channeling water from the Yangtze River to the Yellow River in the North;
installing 7,000 miles of new railway;
modernizing Beijing for the Olympics;
expanding public facilities in Shanghai;
and, perhaps the most critical needs of all, ensuring clean air, pure water and reforestation of particularly arid areas. Without question, China's focus on infrastructure improvements is very important for future success and long-term prosperity.
The second theme illustrated in the Times story is that as China has integrated into the global economy and experienced this incredible economic growth, there has also been a commensurate increase in wealth development and accumulation. There is a new generation of Chinese entrepreneurs, who are more comfortable with personal financial success and beginning to change cultural attitudes.
A recent Merrill Lynch/Capgemini study of wealth around the world showed that in China, the number of high-net-worth individuals grew 22% last year. And while the absolute numbers are still small relative to the total population, the impact of new wealth is evident.
I know from my role as a director at General Motors that China has become one of the largest automotive markets in the world. For GM, it is now the fourth-largest, and is expected to become the second-largest very soon. Recently, GM and its partners announced plans to invest another $3 billion in China.
When I think back to 1986, when I left GM, the Chinese auto market was virtually nonexistent. I can't think of a more powerful statement about what's happened in the last 20 years and what is continuing to happen. And it's not just cars: A recent article reported that China is now the fourth-largest market for high-end Steinway pianos.
Managing this economic momentum is not without its challenges. Some of China's major risks include overheating; a shortage of raw materials, electricity and water; and the risk of inflation.
By taking such measures as raising reserve requirements for the weaker banks and requiring high percentages of equity investment in major projects, the Chinese government is making strides in slowing the economy. The economy is cooling. Looking at sequential performance, in May, China's industrial production showed a slight decline, and bank credit growth also declined in May. It is estimated that China's year-over-year real GDP growth will moderate almost 2% by late 2004, early 2005. In the areas that the Chinese government can control, it is making tremendous progress.
The bottom line: China has tremendous economic momentum, superior resources and an outstanding workforce. The potential is enormous.
That's why companies like Merrill Lynch, General Motors and many others are pouring substantial investments into the country. Those who invested early are benefiting from their ongoing commitment and strong relationships.
We have a joint venture between Merrill Lynch Investment Managers and the Bank of China and we're about to get our full operating license. We're also looking at the potential for joint ventures in other areas and, earlier this year, Merrill Lynch received approval for QFII status.
The Chinese government is adept at crisis management. The Asian Currency Crisis of '97 demonstrated that to the world. China has powerful fundamentals. The Chinese people are highly disciplined, agile. They are conscious of their surroundings and the quality of their work. They have commercial instinct and entrepreneurial zeal, and they're interested in success, but they're also keen nationalists, proud of their country and eager to realize their full potential.
This combination of self-interest and national interest will serve this region well.