I.O.U.S.A. (51 page)

James Areddy

James Areddy is a China correspondent with the
Wall Street Journal,
based in Shanghai. He covers the fi nancial markets, the banking system, the currency in China, and various other fi nancial issues — basically, the bread - and - butter type stories for the
Wall Street Journal.
He and several colleagues recently won the Pulitzer Prize for international reporting and international news. His particular contribution was about riding on the train to Tibet and about how China ’ s economic juggernaut is rat-tling on in one of its more western provinces.

Q:
Why is the Shanghai Bureau important? And where does their
importance fi t in the global economic story?

James Areddy:
China ’ s probably the biggest global economic story going right now. It affects everything from big business, Wall Street, and down - home America to countries all over the world. You can go anywhere and see Chinese people and Chinese exports. Whether it ’ s bicycles or high - air refrigerators or freezers, you certainly are feeling the effects of China pretty much anywhere. Every company wants to sell and be here because it ’ s the world ’ s biggest consumer market, 1.2 billion people.

There ’ s a lot of nervousness around the world about what that means for people ’ s jobs and what it means for their incomes.

Perhaps
anxiety
is a better word than
nervousness,
because there is a lot of opportunity here. There are more and more foreigners pumping into China. They all bring in money, they ’ ve all got investment ideas, and they see China as the new West, as really the untapped frontier. It really is an economic miracle, taking place right now. It is a fascinating story from every possible angle.

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Q:
If you were able to go back a thousand years and look at what ’ s
happened in China in the last 15 years, how would you say life
is different today than it was decades ago?

James Areddy: What ’ s happening in the world ’ s most populist country is that it ’ s transforming into a normal economy and country much like those everywhere around the world. This is a system that for many years was closed off to the rest of world, and didn ’ t want to have anything to do with people outside. China called itself the middle kingdom and saw itself as the center; there was no reason to leave. Two hundred, three hundred, four hundred years ago, when Westerners started arriving on Chinese shores, they found many of the kind of opportunities that people are sensing today, but China never really opened up to those.

China, since 1949, went through economic calamity, political upset, was secretive, and was closed down to the rest of the world for many years. Only in the early 1980s did China start to recognize how the world was changing, and it wanted to be part of the world. It really did open up, it really was allowing itself to interconnect with the world in every way.

Clearly the biggest impact has been economically. You can see people who years ago not only didn ’ t have any access to material goods, whether it ’ s a bicycle or a television, but they didn ’ t even have money to buy those things. If those existed, they were given by the state. (People obtained coupons from their companies to have a new bicycle.) As money started to fl ow into the economy, as people started to have money, there was a shortage of goods.

In more recent years, China has started to make lots of things, so much so that it is exporting them.

It is a highly competitive environment here because people sense a new opportunity and the government has stepped back.

Now the Chinese are able to do what they want — they can start businesses, buy what they want, and increasingly, go where they want. Chinese are traveling abroad in record numbers; there ’ s a fl ood into many, many countries. They are coming back with ideas, and at the same time foreigners are being allowed to come to China and set up in a way that the world really hasn ’ t seen on c15.indd 198

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such a scale for really a long time. Japan is very often used as a comparison, but Japan retained a lot of the closed - naturedness of historic China, whereas China is allowing foreign companies to come in and start factories and start selling products to its people.

Q:
Although China is still a Communist state, it ’ s not
Communism like what the history books tell you. How
would you describe the way this new economic model and
the old political model have come together? Is this a new
Communism?

James Areddy: Right. What ’ s going on in China is very much defi ned by the government stepping back from society. The government ’ s fi ngers are everywhere. It ’ s in people ’ s homes; everyone has a neighborhood committee. There ’ s a little old lady who watches what ’ s going on in every neighborhood, and that ’ s certainly defi ned people ’ s lives for years. It ’ s made them a lot more reluctant to do lots of things, because there were always reports about them.

More and more, what ’ s happening is that no one ’ s paying attention, and that ’ s probably the biggest change. Of course the question is, is China a Communist state or is it not? A lot of people would argue that economically it ’ s not at all and that it ’ s one of the most competitive economies in the world. But the truth of the matter is that the government is still party to much of what happens in the economy, and less in terms of what happens with someone ’ s average life — who they decide to get married to, where they want to travel, what they want to buy, things like that.

Q:
Can you get a handle on how big the Chinese government is
and talk about it in relationship to the American government?

Our government seems to be ever - growing, and the Chinese
government, as you just said, seems to be becoming smaller
or at least stepping back. Do you have a hunch that their
government is stepping back, maybe becoming smaller? Could
you compare the sizes of our government and our involvement?

James Areddy: Chinese people are worried about the same things that Americans are worried about. They ’ re worried about their c15.indd 199

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health care; they ’ re worried about their retirement; they ’ re worried about boosting their own incomes. They look at the government probably a little bit differently. Chinese people aren ’ t really waiting for the government to have a lot of answers for them. It ’ s a little unclear why that is, but they see the government stepping away from everywhere they used to be. The government used to be dictating where they worked and how they lived and things like that, and they ’ re just not anymore. I think that Chinese people extrapolate from that that the government ’ s not going to be involved in their retirement.

But at the same time, the government is pretty involved with lots of businesses. One of the more diffi cult things is trying to decide what is government and what ’ s not government. There are a lot of companies that are quasi - government; there are a lot of people who are businesspeople but in fact are Communist party members. It ’ s a little bit diffi cult sometimes to fi gure out where the government is in China, and that ’ s a probably a big difference compared with the U.S.

Q:
Talk to me about Macro Economics 101. What is a trade defi cit,
and can you describe the trade defi cit that exists today between
the United States and China?

James Areddy: China ’ s making everything from computers to cars, and they have designs on the world ’ s biggest economy, which is the United States. They certainly see that as a market in the same way a lot of companies see China as a market. A lot of things are made quite cheaply in China. American and Western companies are then selling those goods, whether it ’ s computers or whether it ’ s little plastic buckets. Anything that you fi nd on a Wal - Mart store shelf is invariably made in China. Why is that?

It ’ s because they ’ re cheap and they ’ re relatively effi cient; they ’ re making good products here in China. Then, they ’ re exporting that stuff to the U.S., and U.S. consumers are fi nding prices falling for lots of really basic goods. They ’ re able to fi ll up their garages with lots of things that are made in China. The result: a lot of goods, a lot of stuff, a lot of ships fl owing toward the U.S. In response, what China is getting out of it is a lot of money. There are a lot c15.indd 200

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of dollars coming into China from the U.S., and from virtually everywhere in the world.

Q:
If we were keeping score of this defi cit between the two
countries, where do we stand today?

James Areddy: The way people keep score on the trade relationship is often China ’ s foreign exchange reserves. It ’ s the amount of extra money that the government lays claim to. Sometime in late 2006 that number hit a pretty important milestone, $ 1 trillion, and it ’ s continued to rise at a very, very rapid pace. That ’ s basically $ 1 trillion in profi t that China has earned from selling all kinds of things overseas.

Q:
Some people say that if they wanted to, China could infl ict a
lot of pain on the U.S. Do you think that that is a legitimate
concern, or do you think that China is smart enough to know
that what ’ s good for the American economy is good for the
Chinese economy?

James Areddy: What scares a lot of Americans about China ’ s growing prowess and these one trillion - plus in foreign exchange reserves is that a lot of that money is invested in U.S. Treasury bonds and in U.S. government debt. This is keeping U.S. interest rates low and house prices high and allowing the U.S. economy to continue to grow quite well. A lot of people worry that somehow China is going to suddenly ask for its money back and walk away from the U.S. economy. A similar kind of concern took place in the ’ 80s with Japan; everyone worried that Japan would do the same thing.

At the same time, the relationship between the U.S. and Japan is a lot tighter, it seemed, than the relationship between the U.S.

and China. China, for many, is a mystery at the best of times.

Policy making in China is opaque. So there are a lot of concerns that China ’ s somehow going to sell all of this debt and walk away from the American economy. But it ’ s a little hard to see that taking place very quickly. China is a very conservative investor. They ’ re holding U.S. Treasury bonds because they consider those to be very safe investments. They ’ re suddenly a rich investor with lots c15.indd 201

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of money and they want to be safe. They ’ re like any rich person —

they want to hold on to their money; they don ’ t want to be poor again. It ’ s hard to imagine some kind of wholesale pullout from the U.S. bond market, partly because China ’ s such a big player right now. If any big player walks away from the table, that weakens the pool. China would be shooting itself in the foot by suddenly selling lots of Treasury bonds. Could they theoretically do it? Yes, but it seems quite unlikely that there would be a wholesale change very quickly.